Canada's balance of international payments

Canada's current account surplus with the rest of the world, on a seasonally adjusted basis, dropped $2.4 billion in the first quarter of 2006 to $10.7 billion. The decline was mostly the result of a sharp drop in the value of energy exports, which was very high in the fourth quarter of 2005.

In the capital and financial account (not seasonally adjusted), Canada's international assets and liabilities grew by the same value. The increase to Canada's foreign assets came from record high acquisitions by portfolio investors.

Current account

Goods surplus falls

The surplus on trade in goods fell by $3.3 billion to $17.2 billion in the first quarter. Lower prices for natural gas tempered Canada's exports of energy products, after reaching a record level in the fourth quarter of 2005. Imports dropped more modestly in the quarter as the volume of crude oil purchases declined.

Exports of goods fell $4.7 billion in the first quarter. Exports of energy products led the way as lower prices pushed down the export values for these products by $4.0 billion. In the first quarter, prices of natural gas decreased by nearly 30% after strong increases during the previous two quarters.

During the last three quarters, the value of energy products represented on average over 20% of all exports, compared to less than 16% in 2004.

Automotive product exports were down by $1.0 billion in the first quarter, the drop being spread among automobiles, trucks, and parts.

Total imports of goods declined by $1.4 billion and again energy products accounted for the largest share. However, the drop in imports of energy products came mainly from lower volumes, not through lower prices as was the case for the exports of energy products.

Lower profits on direct investment

Lower profits earned by foreign investors on their direct investment in Canada, combined with lower interest payments on portfolio bond liabilities, were the two main factors behind the $1.3 billion decrease in the investment income deficit. The $2.3 billion deficit in the first quarter was the lowest since 1978.

Following two strong quarters, profits earned by foreign direct investors decreased $2.4 billion in the first quarter of 2006. Although still important, lower profits in the energy sector accounted for half of this drop.

The first quarter also saw lower profits earned by Canadians on their direct investment abroad. As the decline was only $1.2 billion, the balance for income on direct investment swung to a positive value for the first time since the first quarter of 1994.

Interest paid on Canadian portfolio bond liabilities continued its downward trend, which started in 2003, while interest received on foreign bonds remained above the $1 billion mark, twice the average amount recorded between 2000 and 2004.

Services deficit increased slightly

In the first quarter, the deficit on trade in services rose for the fourth time in the last five quarters. The deficit in the travel account increased $0.2 billion to $1.8 billion. Changes in other service components largely offset each other.

The $1.8 billion deficit in travel was the largest in 14 years. While Canadian travelers continued to increase their spending abroad, the spending of foreign travelers in Canada decreased for a fifth consecutive quarter. Over this period of five quarters, the travel deficit has risen by $1.0 billion.

Financial account

Record investment in foreign securities

During the first quarter, Canadian investors bought a record amount of foreign securities consisting of debt instruments and equities. Over half of the $19.0 billion investment in the first quarter was in foreign bonds, itself a record. Foreign content limits for tax-deferred Canadian investment vehicles were eliminated during 2005, contributing to the activity.

Some $9.9 billion flowed into foreign bonds, with most of the investment (60%) going to US treasuries and corporate bonds. The remaining $3.9 billion was invested in overseas bonds. A sizable portion of the record investment in foreign bonds consisted of "Maple" bonds. This rapidly growing segment of the bond market involves foreign issuers marketing debt denominated in Canadian dollars to institutional investors in Canada.

Canadians purchased $8.0 billion of foreign equities in the first quarter, the second highest quarterly investment in the past four years. Over four-fifths went to buy US shares with the remainder to overseas equities. Canadian investors also purchased $1.0 billion worth of foreign money market paper. Canadians bought $1.5 billion of overseas paper while selling $0.5 billion of their holdings of US government and corporate paper.

Direct investment abroad moderated by sale of assets

In the first quarter, Canadian direct investment in foreign economies was just over half of that of the previous quarter. At $6.6 billion, it was driven by injections of working capital into existing foreign affiliates. Canadians sold off more direct investment assets overseas than they acquired during the quarter, resulting in negative net acquisitions. From an industry perspective, investment was spread, led by the finance and insurance sector. Geographically, about three-quarters went to the American economy.

Foreign direct investment in Canada robust for a third straight quarter

Foreign direct investment in Canada advanced strongly for a third consecutive quarter. Although less than the previous two quarters, the $12.0 billion of direct investment was again largely due to acquisitions. Two-thirds of this foreign direct investment went to the energy and metallic minerals sector while over half of the investment came from Europe.

Foreign investment in Canadian securities strongest in five quarters

Foreign investors bought $8.2 billion worth of Canadian securities led by purchases of outstanding Canadian equities. It was the largest net investment in Canadian securities by foreign investors in the last five quarters. Overall investment in debt instruments was negligible, as foreign investors bought money market paper but sold bonds.

The $8.1 billion net foreign investment in Canadian equities was led by the acquisition of $10.6 billion of outstanding Canadian shares by non-residents. This was partly offset by reductions associated with the foreign takeover of Canadian firms, which saw foreign (portfolio) shareholders in these firms exchanging their Canadian shares for cash or foreign shares. US investors were behind most (80%) of the investment in the quarter as they were in 2005. The first quarter purchases occurred against a backdrop of rising Canadian share prices: the S&P/TSX Composite Index rose more than 22% over a nine month period.

Foreign investors buy Canadian paper but sell bonds for a second straight quarter

Foreign investors made a significant investment in Canadian money market paper for a second consecutive quarter. The fourth quarter investment of $3.1 billion was the highest value in more than five years. The $2.0 billion foreign investment during the first quarter went to federal t-bills. During the quarter, the government of Canada had a large issue of US-pay Canada bills. Regionally, the investment was entirely purchased by American investors. With short-term rates on the rise in both countries, US rates continue to be higher with the differential at the end of the period at 65 basis points, favouring investment in the United States.

Non-residents sold Canadian bonds for a third consecutive quarter. The divestment of $1.9 billion in the quarter was largely the result of net retirements (retirements less new issues). There have been high levels of retirements over the past three quarters and at the same time new issues sold in foreign markets have trended down. However, non-residents continued to buy outstanding bonds, mainly denominated in Canadian dollars. Over the first quarter, the divestment was led by European investors while investors from Japan continued to move against the trend and buy Canadian bonds.

Transactions in deposits, loans and reserves

The other investment account recorded a net inflow of $4.6 billion. The inflow was mostly related to higher liabilities, both loans and deposits. On the asset side, Canada's official international reserves rose by $3.8 billion, the highest quarterly increase in six years. The Canadian dollar ended the first quarter virtually the same as it began, at 85.6 US cents. The Canadian dollar was down somewhat against most other major foreign currencies.

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 first quarter 2006 issue of Canada's Balance of International Payments (67-001-XIE, free) will be available soon.

The balance of international payments data for the second quarter of 2006 will be released on August 30.

For general information, contact Client Services (613-951-1855; infobalance@statcan.gc.ca). To enquire about the concepts, methods or data quality of this release, contact Arthur Ridgeway (613-951-8907), Balance of Payments Division.