Canada's balance of international payments

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Canada's current account surplus with the rest of the world (on a seasonally adjusted basis) decreased $5.3 billion in the third quarter of 2007 to $1.0 billion. The lowest current account surplus since the second quarter of 2003 resulted mostly from a large drop in the goods surplus.

In the capital and financial account (not seasonally adjusted), both outward and inward investment flows slowed appreciably in the third quarter of 2007. Nevertheless, Canada's net foreign assets advanced by almost twice the pace of its net international liabilities, despite the first quarterly reduction in Canadian holdings of foreign securities in over 12 years and large foreign takeovers of Canadian companies.

Current account

Large drop in the goods surplus, as some commodity prices fall

The surplus on trade in goods plunged $5.3 billion to reach $11.1 billion in the third quarter, the lowest level since the second quarter of 1999. Goods exports dropped 2.7% to $116.0 billion while imports rebounded after a drop in the second quarter. The $3.2 billion decline in exports was widespread, affecting almost all the major categories of products.

Exports of energy products fell $0.8 billion in the third quarter, due to a 15% drop in the price of natural gas. Higher export volumes for natural gas and crude petroleum, as well as higher prices for crude petroleum, were not enough to offset the effect of falling natural gas prices. Lower volumes and prices of other energy products also contributed to the decline in the third quarter.

After increasing for seven consecutive quarters, exports of industrial materials fell $0.6 billion during the third quarter. Prices of industrial materials were down slightly, on average, but remained close to historical highs. The largest price decreases were for nickel ores, nickel and alloys, and inorganic chemicals (including uranium), after strong price increases in the second quarter. These declines were largely offset by higher prices for other industrial materials.

Exports of machinery and equipment were also down $0.6 billion, with the largest decrease occurring in aircraft and other non-automotive transportation equipment. Automotive products fell again, but not as steeply as in the second quarter.

Forestry product exports continued their decline in the third quarter, losing $0.5 billion, mostly in lumber and newsprint. Since the end of 2005, exports of forestry products have declined 23% due to lower volumes and prices.

A rebound in imports also pulls down goods surplus

After falling back in the second quarter, imports of goods resumed an upward trend, increasing $2.0 billion to a record $104.9 billion, just slightly higher than the first quarter level. Most of the gains were reflected in a turnaround in both automotive products and in machinery and equipment.

Imports of automotive products increased $0.8 billion due mainly to stronger imports of passenger motor vehicles, which, at $7.0 billion, reached their second highest level ever. The $0.6-billion increase in machinery and equipment reflected record imports of aircraft, engines and parts, which reached $3.0 billion for the first time.

Energy product imports were flat in the third quarter as higher imports of crude petroleum were offset by a reduction in other energy products.

Services deficit narrows, despite record travel deficit

The services deficit narrowed slightly in the third quarter. The record deficit in travel was outweighed by a sharp decline in the deficit for commercial services. Nonetheless, the $4.6 billion overall services deficit was the second largest ever.

The travel deficit increased $0.3 billion to a peak of $2.5 billion. As the value of the Canadian dollar continued to rise in the third quarter, the number of Canadian travellers going to United States increased 5.5% and their spending reached almost $3.9 billion, a 10.3% increase over the second quarter and, by far, the largest level ever recorded. As spending by US travellers in Canada remained unchanged from the second quarter, the travel deficit with the United States was $1.8 billion, the highest since the end of 1991.

The higher travel deficit was more than offset by a much reduced deficit in commercial services. The $0.3 billion deficit was the lowest since the end of 2005 and was mainly due to lower payments for financial services and, to a lesser extent, royalties. The drop in financial services imports reflected a more typical volume of transactions in foreign stocks, after two exceptionally strong quarters, and a reduction in new Canadian bonds issued abroad.

The deficit on transportation services was close to $2.0 billion in the third quarter as payments on passenger fares reached another record.

Investment income deficit widens marginally

The investment income deficit widened by $0.2 billion to $5.6 billion during the third quarter as the increase in payments outpaced the increase in receipts.

Profits earned by foreign direct investors in Canada increased $0.8 billion to a high of $9.8 billion. The energy sector remained the largest source of profits for foreign direct investors, despite a decline in the third quarter.

Interest income received by Canadian portfolio investors declined for the first time since the second quarter of 2005. Receipts totalled $2.1 billion in the third quarter, a decline of $95 million from the high reached in the previous quarter.

Financial account

Rare divestment in foreign securities, led by money market instruments

Canadian residents divested $8.0 billion worth of foreign securities in the third quarter, all in debt instruments, following record investments over the past two quarters. The first quarterly divestment of foreign securities in over 12 years coincided with the recent global meltdown in the asset-backed commercial paper market.

Canadian investments in foreign money market instruments plunged by a record $10.4 billion over the quarter, eliminating more than one-half of those holdings. Three-quarters of the reduction was in non-US corporate paper, mainly issues of European banks. Meanwhile, Canadian investors acquired $506 million worth of safer US government treasury bills.

Canadian investors also reduced their holdings of foreign bonds by $1.7 billion in the third quarter, interrupting nearly four years of exceptionally heavy investment in foreign long-term debt. In contrast to the money market, this divestment was concentrated in US government bonds ($4.8 billion). Canadians continued to acquire US corporate and non-US bonds ($3.1 billion), but at a slower pace than in the first two quarters of 2007.

Investment in foreign stocks remained robust in the third quarter at $4.1 billion, evenly split between US and non-US equities.

Direct investment abroad slows down for a third consecutive quarter

Canadian direct investment abroad amounted to $8.7 billion in the third quarter, its lowest level in six quarters. Over half of these outflows ($4.8 billion) resulted from acquisitions.

Direct investment in the energy and metallic minerals sector rebounded to $5.7 billion. This occurred against the backdrop of a global economy characterized by rising oil prices and a depreciating US dollar. On the other hand, investment in the finance and insurance sector slowed down significantly from previous quarters to $2.2 billion. The United States received the bulk of the investment from Canadian direct investors ($4.0 billion).

Large foreign direct investment in the Canadian economy driven by acquisitions

Capital flows into the Canadian economy by foreign direct investors surpassed the $20-billion mark for the fifth consecutive quarter, reaching $28.6 billion in the third quarter of 2007. This was the highest quarter of foreign direct investment inflows since the tech bubble in 2000. Most of the inflows served to acquire Canadian firms ($18.8 billion).

Direct investors from the European Union were the most active, with investments totalling $17.9 billion during the quarter. The two sectors of the Canadian economy obtaining the bulk of the financing from abroad were the energy and metallic minerals sector ($10.6 billion) and the finance and insurance sector ($9.3 billion).

The trend of heavy direct investment into Canada started in the third quarter of 2006 and has totalled $125.2 billion since then. Direct investment activity during this period has been driven to a large extent by the high level of acquisitions of Canadian firms ($91.7 billion).

Foreign takeovers lead to a record foreign portfolio divestment in Canadian securities

Foreign portfolio holdings of Canadian securities fell $9.9 billion in the third quarter, led by equities and marking the largest ever quarterly decline. The bulk of the $8.5 billion divestment of Canadian equities during the third quarter was due to foreign takeovers of Canadian companies and the resulting retirement of foreign-held portfolio shares. In addition, foreign investors sold $2.3 billion worth of portfolio shares at a time when Canadian equity prices were up slightly for the quarter (+1.4%).

Foreign holdings of Canadian bonds were largely unchanged in the third quarter (-$189 million). Non-resident investors purchased $6.0 billion worth of outstanding issues, but this was more than offset by substantial net retirements (retirements less new issues), mostly in federal and provincial government issues.

Non-residents sold $1.2 billion of Canadian money market paper in the third quarter. All the foreign divestment was in federal and provincial issues. Investment in government enterprise paper ($1.0 billion) was completely offset by divestment in other corporate paper.

Transactions in deposits, loans and reserves assets

The other investment account recorded a significant net outflow of $26.2 billion over the quarter. The outflow was mostly related to strong growth in both deposit and loan assets. A large reduction in Canadian short-term loans from abroad in the form of repurchase agreements also added to the outflow on the quarter. The Canadian dollar finally broke parity with the US dollar closing the third quarter at just over 100 US cents, an increase of 6.6 US cents from the previous quarter's close. The Canadian dollar was also up against most other major 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 third quarter 2007 issue of Canada's Balance of International Payments (67-001-XWE, free) will be available soon.

The balance of international payments data for the fourth quarter of 2007 will be released on February 29, 2008.

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.

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