Balance of international payments

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Second quarter 2008

Balance of international payments note to readers

Highlights

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.

Chart D.1 Current account surplus widens further

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.

Once again, accelerating energy prices were the main factors 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 influencing 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.

Chart D.2 Larger gains in prices drive the value of exports of energy products

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.

Chart D.3 Services and investment income deficits moderately expand

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 U.S., which accounts for about 55% of total travel spending, declined. After a record high in the fourth quarter of 2007 the travel deficit with 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.

Chart D.4 Record foreign investment in Canadian securities, led by bonds

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.

Chart D.5 The strong pace of foreign direct investment in Canada drops off

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 this quarter’s outward investment 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.

Chart D.6 Canadian direct investment abroad slows¹

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 to 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-U.S. shares.

Chart D.7 Canadian investors continue to shy away from foreign debt instruments¹

Most of this quarter’s divestment 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.

Data tables

• Table D.1 Balance of payments
• Table D.2 Current account

Information on methods and data quality available in the Integrated Meta Data Base: 1534, 1535 and 1536.