Thursday, August 28, 2008

Canada's balance of international payments

The current account surplus with the rest of the world (on a seasonally adjusted basis) expanded further to $6.8 billion in the second quarter of 2008, led by exports of goods. These gains were mainly attributable to higher prices for several exported commodities, which pushed the goods surplus to $16.4 billion. Transactions in services and investment income had a dampening effect on the increase in the current account balance in the second quarter.

Net transactions in the capital and financial account (unadjusted for seasonal variation) were more subdued than in several previous quarters, with outflows of funds exceeding inflows. There was strong foreign demand for Canadian securities, in particular bonds, while foreign direct investment into Canada slowed significantly. For their part, Canadian investors continued to shy away from foreign debt instruments in favour of equity, while Canadian direct investment and other investment flows moderated.

Goods surplus buoyed by higher commodity prices

The increase in the value of exports exceeded that of imports for the second consecutive quarter. As a result, the second quarter 2008 surplus on goods was the largest since the fourth quarter of 2005.

Note to readers The balance of payments covers all economic transactions between Canadian residents and non-residents, in two accounts — the current account and the capital and financial account. The current account covers transactions in goods, services, investment income and current transfers. Exports and interest income are examples of receipts, while imports and interest expense are payments. The overall balance of receipts and payments is Canada's current account surplus or deficit. The capital and financial account is mainly composed of transactions in financial instruments. Financial assets and liabilities with non-residents are presented in three functional classes: direct investment, portfolio investment and all other types of investment. These flows arise from financial activities of either Canadian residents (foreign assets of Canadian investors) or non-residents (Canadian liabilities to foreign investors). Transactions resulting in capital inflows to Canada are presented as positive values while those giving rise to capital outflows from Canada are shown as negative values. In principle, a current account surplus corresponds to an equivalent net outflow in the capital and financial account; and, a current account deficit corresponds to an equivalent net inflow in the capital and financial account. In other words, the two accounts should add to zero. In practice, as data are compiled from multiple sources, this is rarely the case and gives rise to measurement error. The statistical discrepancy is the unobserved net inflow or outflow.

Once again, accelerating energy prices were the main factor behind the strength in the value of sales of goods to other countries. Despite a marginal decline in volumes, export values for crude petroleum were up $3.0 billion on strong price gains (+25%).

The increase in the value of exports of natural gas arose from sharply higher gas prices (+33%), as volumes declined 14%. Export values for coal more than doubled in the second quarter, due to high international demand, which influenced both prices and volumes. Exports of forestry products advanced modestly for the first time since 2005, driven by price gains.

Automotive products continued to decrease despite higher exports of passenger autos. This was the fifth consecutive drop in foreign sales of automotive products, bringing these values to the lowest levels since the fourth quarter of 1996.

Imports of goods rose at a faster clip than in the first quarter. Nearly half of the increase came from higher imports of crude petroleum, through a combination of higher prices and volumes.

Services deficit increases, moderated by travel

The services deficit edged up, moderated by travel in the second quarter. During the first half of 2008, Canadians' travel expenditures in the United States, which accounts for about 55% of total travel spending, declined. After a record high in the fourth quarter of 2007, the travel deficit with the United States shrank for the second consecutive quarter, although the reduction was marginal in the second quarter.

The deficits on commercial services and, to a lesser extent, on transportation widened during the second quarter. Larger payments to foreign providers of financial and transportation services were key contributors to these higher deficits.

The deficit on investment income is up

During the second quarter of 2008, the investment income deficit was up, as payments to non-residents increased more than receipts from abroad. Both profits earned by foreigners on direct investment in Canada and by Canadians on their direct investment abroad strongly increased during the second quarter.

Lower interest receipts on some foreign currency-dominated assets pushed down the revenues from other investment. While higher interest payments on Canadian bonds were in line with the strength in the foreign purchases of Canadian bonds in recent quarters, higher interest receipts on foreign securities reflected changes in yields.

Foreign demand for Canadian securities reaches high

Non-residents' investment in Canadian securities amounted to an unprecedented $27.6 billion during the second quarter and was dominated by investment in debt instruments. Canadian issuers, largely private corporations and federal government enterprises, were active on global debt markets, and foreign acquisitions of Canadian bonds ($19.6 billion) reflected this. At the same time, the demand for Canadian money market instruments rebounded ($2.7 billion), split between federal and provincial government paper.

Foreign acquisitions of Canadian stocks ($5.4 billion) were up for a second consecutive quarter. The Canadian equity market was the only major world market to post a year-to-date gain at the end of June, boosted by higher energy and commodity prices.

Direct investment in Canada lowest in three years

Foreign direct investment activity in Canada slowed substantially in the second quarter ($4.7 billion), as the strong pace of the last several quarters was not sustained. Acquisitions of Canadian firms by foreign direct investors were negligible in the second quarter, after decelerating in the first quarter. Investment flows in the quarter were comprised of reinvested earnings from operations of affiliates in Canada, with about half accounted for in the Canadian energy and metallic minerals sector.

Canadian direct investment abroad loses steam, but outpaces inward investment

Canadian direct investment abroad ($11.7 billion) was about half of the outflows recorded for the first quarter. Investment flows into foreign economies resulted from foreign acquisitions by Canadian corporations as well as from higher profits earned and re-invested in affiliates operating abroad. Nearly half of the outward investment in the second quarter was directed to the finance and insurance sector.

Despite losing steam, Canadian direct investment abroad outpaced foreign direct investment in Canada for a second consecutive quarter. This resulted in a net outflow in the direct investment account of $7.1 billion in the second quarter.

Canadian investors continue to favour foreign equities over debt instruments

Canadians acquired $2.9 billion of foreign securities in the second quarter, a slowdown compared with previous quarters. Domestic holdings of foreign debt instruments narrowed while Canadians have now added foreign shares to their portfolios for 21 consecutive quarters ($4.8 billion), mainly non-US shares.

Most of the divestment in the second quarter came from net sales of foreign paper and net retirements of maple bonds, the Canadian dollar-denominated foreign bonds. The first half of 2008, with a reduction in holdings of $1.4 billion in foreign debt instruments, stands in contrast to the substantial net investment over the same period in 2007 before the impact of the global credit turmoil.

Available on CANSIM: tables 376-0001 to 376-0017 and 376-0035.

Definitions, data sources and methods: survey numbers, including related surveys, 1534, 1535, 1536 and 1537.

The second quarter 2008 issue of Canada's Balance of International Payments (67-001-XWE, free) will be available soon.

The balance of international payments data for the third quarter of 2008 will be released on November 28.

For general information, or to enquire about the concepts, methods or data quality of this release, contact Client Services (613-951-1855; infobalance@statcan.gc.ca), Balance of Payments Division.

Balance of payments
	Second quarter 2007	Third quarter 2007	Fourth quarter 2007	First quarter 2008	Second quarter 2008	2006	2007
	Not seasonally adjusted
	$ millions
Current account
Receipts
Goods and services	138,995	130,747	126,697	130,851	146,892	520,960	530,332
Goods	121,951	111,695	110,833	115,644	130,084	453,732	463,051
Services	17,044	19,052	15,864	15,207	16,807	67,227	67,280
Investment income	18,151	18,220	18,685	17,214	19,253	64,497	71,417
Direct investment	9,578	9,696	9,657	7,689	9,770	34,978	37,139
Portfolio investment	5,621	5,449	5,240	5,416	5,772	17,387	21,683
Other investment	2,951	3,074	3,788	4,109	3,711	12,131	12,595
Current transfers	2,150	2,142	2,709	2,841	2,276	9,700	9,545
Current account receipts	159,295	151,109	148,091	150,907	168,420	595,156	611,294
Payments
Goods and services	128,687	123,521	123,394	124,828	137,287	486,245	501,474
Goods	106,949	101,920	101,825	101,867	114,242	404,253	415,006
Services	21,738	21,601	21,569	22,960	23,045	81,992	86,468
Investment income	21,548	20,717	21,227	21,019	21,804	77,872	85,611
Direct investment	9,832	9,220	9,384	9,713	10,507	34,354	38,444
Portfolio investment	7,757	7,707	7,506	7,440	7,708	29,270	30,809
Other investment	3,958	3,790	4,337	3,866	3,589	14,247	16,358
Current transfers	2,037	2,397	2,505	3,315	2,291	10,809	10,601
Current account payments	152,272	146,635	147,125	149,161	161,382	574,925	597,686
Balances
Goods and services	10,308	7,226	3,302	6,024	9,605	34,715	28,858
Goods	15,002	9,775	9,007	13,777	15,842	49,480	48,046
Services	-4,695	-2,549	-5,705	-7,753	-6,237	-14,765	-19,188
Investment income	-3,397	-2,497	-2,541	-3,804	-2,551	-13,375	-14,194
Direct investment	-254	476	274	-2,023	-737	623	-1,305
Portfolio investment	-2,136	-2,257	-2,266	-2,024	-1,936	-11,883	-9,126
Other investment	-1,007	-715	-549	243	122	-2,115	-3,763
Current transfers	113	-255	204	-473	-16	-1,109	-1,056
Current account balance	7,023	4,473	965	1,746	7,038	20,231	13,607
Capital and financial account1, 2
Capital account	1,014	1,037	907	1,183	1,169	4,130	4,199
Financial account	-8,225	-9,017	2,666	-902	-5,954	-21,328	-21,951
Canadian assets, net flows
Canadian direct investment abroad	-11,624	-12,920	-16,017	-23,132	-11,738	-44,373	-57,806
Portfolio investment	-24,266	7,979	-5,378	-3,454	-2,874	-78,492	-48,422
Foreign bonds	-16,336	1,688	2,932	-685	1,392	-43,602	-28,903
Foreign stocks	-7,691	-4,082	-9,828	-2,891	-4,793	-28,090	-30,941
Foreign money market	-239	10,373	1,518	121	527	-6,800	11,422
Other investment	-16,572	-19,848	-8,997	-18,827	-3,058	-36,022	-63,866
Loans	2,582	-9,162	1,770	-3,684	2,743	-12,314	-9,819
Deposits	-13,168	-16,555	-6,691	-14,543	-3,760	-8,997	-41,993
Official international reserves	-366	-144	588	247	-1,816	-1,013	-4,644
Other assets	-5,620	6,013	-4,664	-847	-225	-13,698	-7,410
Total Canadian assets, net flows	-52,462	-24,789	-30,392	-45,413	-17,671	-158,886	-170,093
Canadian liabilities, net flows
Foreign direct investment in Canada	20,647	27,770	49,270	17,311	4,681	71,198	116,706
Portfolio investment	-2,061	-9,144	-27,122	9,972	27,636	31,656	-31,591
Canadian bonds	-2,168	541	5,198	9,700	19,562	17,130	11,540
Canadian stocks	-899	-8,524	-32,039	3,717	5,383	10,814	-41,994
Canadian money market	1,006	-1,160	-280	-3,445	2,692	3,711	-1,137
Other investment	25,651	-2,854	10,910	17,228	-20,600	34,704	63,027
Loans	2,796	-3,946	7,423	512	-5,127	14,638	10,670
Deposits	22,334	-21	4,417	16,165	-15,718	20,384	48,574
Other liabilities	522	1,114	-931	552	245	-318	3,783
Total Canadian liabilities, net flows	44,237	15,772	33,058	44,512	11,718	137,558	148,143
Total capital and financial account, net flows	-7,212	-7,980	3,573	281	-4,785	-17,198	-17,752
Statistical discrepancy	188	3,506	-4,538	-2,027	-2,253	-3,033	4,144
1. A minus sign (-) denotes an outflow of capital resulting from an increase in claims on non-residents or from a decrease in liabilities to non-residents. 2. Transactions are recorded on a net basis.

Current account
	Second quarter 2007	Third quarter 2007	Fourth quarter 2007	First quarter 2008	Second quarter 2008	2006	2007
	Seasonally adjusted
	$ millions
Receipts
Goods and services	135,282	131,114	128,018	133,527	142,388	520,960	530,332
Goods	118,279	114,509	111,151	116,936	125,656	453,732	463,051
Services	17,003	16,605	16,866	16,592	16,733	67,227	67,280
Travel	4,204	4,143	4,161	3,981	4,047	16,610	16,634
Transportation	3,079	2,998	3,005	3,089	3,176	11,879	12,157
Commercial services	9,291	9,043	9,271	9,097	9,081	37,008	36,775
Government services	429	421	429	425	429	1,730	1,714
Investment income	17,482	18,432	18,879	17,764	18,450	64,497	71,417
Direct investment	9,183	9,951	9,672	8,218	9,198	34,978	37,139
Interest	485	520	516	499	667	1,477	1,935
Profits	8,698	9,431	9,156	7,718	8,530	33,501	35,203
Portfolio investment	5,457	5,507	5,338	5,426	5,587	17,387	21,683
Interest	2,139	2,092	1,832	1,648	1,760	6,172	8,089
Dividends	3,317	3,415	3,505	3,778	3,828	11,216	13,594
Other investment	2,842	2,973	3,870	4,120	3,665	12,131	12,595
Current transfers	2,372	2,456	2,384	2,463	2,478	9,700	9,545
Private	649	668	605	709	640	2,698	2,656
Official	1,723	1,788	1,779	1,754	1,839	7,002	6,890
Total receipts	155,136	152,002	149,281	153,754	163,316	595,156	611,294
Payments
Goods and services	124,010	126,580	124,710	126,075	131,846	486,245	501,474
Goods	102,629	105,108	101,996	103,988	109,219	404,253	415,006
Services	21,381	21,472	22,714	22,087	22,627	81,992	86,468
Travel	6,209	6,892	7,530	7,163	7,199	23,402	26,663
Transportation	4,977	4,800	5,358	5,236	5,488	18,695	20,032
Commercial services	9,927	9,508	9,551	9,413	9,669	38,853	38,691
Government services	269	272	275	276	270	1,042	1,082
Investment income	21,570	21,063	21,173	20,669	21,837	77,872	85,611
Direct investment	9,721	9,287	9,542	9,727	10,430	34,354	38,444
Interest	631	617	622	612	611	2,469	2,484
Profits	9,090	8,670	8,920	9,115	9,819	31,886	35,960
Portfolio investment	7,713	7,725	7,553	7,438	7,651	29,270	30,809
Interest	5,752	5,641	5,458	5,473	5,595	22,294	22,746
Dividends	1,961	2,084	2,095	1,964	2,056	6,976	8,063
Other investment	4,136	4,051	4,078	3,505	3,756	14,247	16,358
Current transfers	2,423	2,618	2,620	2,553	2,875	10,809	10,601
Private	1,558	1,608	1,630	1,582	1,619	7,261	6,794
Official	866	1,010	990	971	1,256	3,548	3,807
Total payments	148,004	150,260	148,503	149,297	156,558	574,925	597,686
Balances
Goods and services	11,272	4,534	3,307	7,452	10,543	34,715	28,858
Goods	15,650	9,401	9,155	12,948	16,437	49,480	48,046
Services	-4,378	-4,867	-5,848	-5,496	-5,894	-14,765	-19,188
Travel	-2,005	-2,749	-3,369	-3,182	-3,151	-6,792	-10,029
Transportation	-1,897	-1,802	-2,353	-2,147	-2,313	-6,816	-7,875
Commercial services	-635	-465	-280	-315	-588	-1,845	-1,915
Government services	160	149	155	149	159	688	632
Investment income	-4,088	-2,631	-2,293	-2,905	-3,388	-13,375	-14,194
Direct investment	-539	664	130	-1,509	-1,232	623	-1,305
Interest	-146	-97	-106	-113	56	-992	-548
Profits	-392	761	236	-1,396	-1,288	1,615	-757
Portfolio investment	-2,256	-2,217	-2,215	-2,011	-2,064	-11,883	-9,126
Interest	-3,613	-3,549	-3,625	-3,825	-3,835	-16,122	-14,657
Dividends	1,357	1,331	1,410	1,814	1,771	4,239	5,531
Other investment	-1,294	-1,077	-208	615	-92	-2,115	-3,763
Current transfers	-52	-162	-236	-90	-397	-1,109	-1,056
Private	-909	-940	-1,025	-873	-979	-4,563	-4,139
Official	857	778	789	783	582	3,454	3,083
Current account	7,132	1,742	778	4,457	6,758	20,231	13,607