Canada: Balance of International Payments, Q4 2016

Canada’s current account deficit (on a seasonally adjusted basis) narrowed by $9.0 billion in the fourth quarter to $10.7 billion as the goods balance posted its first surplus in more than two years.

In the financial account (unadjusted for seasonal variation), foreign investment in Canadian private corporate securities led the inflow of funds in the economy in the quarter.

For the year 2016, the current account deficit edged up $0.1 billion to $67.7 billion. The deficit on goods expanded, mainly on lower exports of energy products. A lower deficit on services moderated the overall increase in the current account deficit in 2016.

In the financial account, transactions in securities generated a record net inflow of funds of $147.5 billion in 2016. These inflows were partially offset by outflows in direct and other investment. Direct investment abroad exceeded direct investment in Canada by $43.3 billion in 2016.

Since the return to a current account deficit in 2009, the funding of this deficit has mostly come from transactions in securities. Foreign investment in Canadian securities has steadily exceeded Canadian investment in foreign securities during this period.

Current Account

Trade in goods balance moves to a surplus

The balance on the international trade in goods posted a $0.8 billion surplus in the fourth quarter, following an $8.6 billion deficit the previous quarter. For the year as a whole, the goods deficit was up $2.9 billion to a record $25.9 billion.

On a geographical basis, the goods surplus with the United States, led by stronger exports of energy products, increased $3.7 billion to $12.0 billion in the fourth quarter. Meanwhile, the deficit with non-US countries narrowed by $5.7 billion to $11.2 billion, mainly on record exports.

Total exports of goods rose $6.3 billion to $136.5 billion in the fourth quarter. Energy products, led by crude petroleum, were the major contributor with exports up $4.7 billion on higher prices and, to a lesser extent, higher volumes. Despite the gains in the fourth quarter, exports were down by $3.6 billion in 2016 as energy products continued to decline.

Total imports of goods were down $3.1 billion to $135.8 billion. Industrial machinery, equipment and parts recorded the largest reduction, down $2.7 billion. This followed a high in the third quarter, with activity dominated by the import of a large module for the Hebron offshore oil project in Newfoundland and Labrador. For the year, imports edged down by $0.7 billion.

Balance on trade in services unchanged

The overall deficit on international trade in services remained at $5.5 billion in the fourth quarter. For the year 2016, the services deficit narrowed $2.4 billion to $22.1 billion on a lower travel deficit. Spending by foreign travellers in Canada increased by $2.9 billion in 2016.

In the fourth quarter, the travel deficit was unchanged at $3.6 billion. Receipts and payments rose as both the number of international overnight travellers visiting Canada and the number of Canadians travelling abroad for one or more nights increased.

The deficit on transport services was down $0.2 billion, mostly due to lower payments on water transport. This was partially offset by a $0.1 billion reduction in the commercial services surplus.

Deficit on investment income expands

The investment income deficit, the difference between incomes generated on Canada’s international assets and liabilities, increased $0.5 billion to $4.8 billion in the fourth quarter.

Profits earned by foreign direct investors on their Canadian assets were up $1.3 billion to their highest level since the end of 2014. On the receipt side, profits earned by Canadian direct investors on their assets abroad increased by $1.1 billion.

Higher income payments on foreign holdings of Canadian securities, both equity and debt securities, also contributed to the increase in the deficit in the fourth quarter.

Financial account

Foreign investors acquire Canadian private corporate securities

Foreign investment in Canadian securities totalled $33.3 billion in the fourth quarter, led by acquisitions of instruments issued by private corporations. For the year, foreign acquisitions of Canadian securities reached a record $161.3 billion.

Foreign investment in Canadian bonds slowed to $11.6 billion, from $34.0 billion in the third quarter. Non-resident investors also acquired $4.7 billion of Canadian money market instruments. This activity was led by new issues abroad of private corporate debt securities denominated in US dollars.

Foreign investors added $17.0 billion of Canadian shares to their holdings in the fourth quarter, the largest investment since the second quarter of 2004. Canadian stock prices were up by 3.8% and the Canadian dollar depreciated against its US counterpart by 1.8 US cents in the quarter.

Canadian investment in foreign securities slowed to $0.7 billion in the fourth quarter, from $8.0 billion in the third quarter. Purchases of foreign shares were moderated by sales of foreign debt securities.

Canadian investment in foreign shares amounted to $10.1 billion, led by purchases of non-US foreign shares. At the same time, Canadian holdings of foreign debt securities were down by $9.4 billion, the largest decline since the fourth quarter of 2008. A record divestment in US Treasury instruments contributed to the decline in the quarter.

Outward direct investment outpaces inward direct investment

Direct investment abroad reached $29.8 billion in the fourth quarter, with the investment almost entirely in the form of equity instruments. Approximately one-half of the investment was related to merger and acquisition activities, and about half of the direct investment abroad was in the United States. The fourth quarter closed a year of strong outward direct investment by Canadian corporations, led by mergers and acquisitions activity.

Direct investment in Canada was $9.7 billion in the fourth quarter, slightly higher than the $9.1 billion recorded in the third quarter. For a second straight quarter, equity investment made by foreign parents in Canadian affiliates accounted for all of the investment as there was a reduction in debt liabilities of Canadian affiliates to their foreign parents. For the year, inward direct investment was the lowest since 2011 at $41.8 billion.

StatsCanada

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell