EDC ECONOMICS

Todd Evans
Director, Economic Analysis and Forecasting
February 22, 2006

Canadian Benefits Scorecard – 2005 Highlights

! EDC carried out $57.4 billion in international trade and investment transactions on behalf of
Canadian companies during 2005, an increase of 4.6% over 2004.
! In 1997, EDC’s international business volume facilitated about 8% of Canada's total exports
of goods and services. By 2005, this share had reached 12%.
! EDC executed transactions on behalf of 6,828 Canadian companies, a drop of 1.9% from
2004. The drop in customers during 2005 was among SMEs. But the total volume of SME
transactions conducted by EDC increased 31% to $15.5 billion.
! EDC supported $13.3 billion in transactions in developing countries, a 15.3% rise over 2004.
! The exports and FDI facilitated by EDC helped generate $37.4 billion in Canadian GDP and
supported more than 457,000 jobs. This equates to 3.4% of total Canadian GDP and 2.8% of
national employment.

Background – Canadian Exports and FDI outflows remain strong in 2005

The past year was a good one for the world economy and Canadian exports of goods and
services responded, rising by 5.7% on the year. Direct investment in foreign economies (FDI)
by Canadians also came in strong during 2005, amounting to an estimated $40 billion – down
from the previous year but still well above the historical average. But higher raw material and
energy costs, along with the appreciation in the Canadian dollar, made for a tougher business
environment. EDC’s Trade Confidence Index (TCI), which surveys 1,000 Canadian exporting
companies, reflects this sentiment as well. The TCI fell to 71.7 in the Fall of 2005, down from
73.7 in the Spring.

Export sales during the final

Chart 1: Exports gain momentum in final months of 2005
months of 2005 have shown
(Cdn merchandise exports, bn $Cdn)
resiliency in the face of a
stronger Canadian dollar. While 41
Canadian exporters have Exports ($ value)
certainly been challenged by the 39 Export Volumes (physical quantity)
higher loonie, many firms have
billions $Cdn

taken significant actions to offset 37

it. Widespread cost-cutting and
large investments in machinery 35
and technology have enabled
33
Canada’s export sector to
remain competitive. Growth in
31
machinery and equipment
investment during 2005 was the 29
strongest since the Y2K-led Jan- May- Sep- Jan- May- Sep- Jan- May- Sep- Jan- May- Sep- Jan-
surge in 2000. This renewed 02 02 02 03 03 03 04 04 04 05 05 05 06
focus on cost cutting and

Canadian Benefits Scorecard – 2005 1

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efficiency-enhancing investment should boost productivity of Canadian companies over the next
few years, further improving their ability to compete in international markets. This upturn in
capital spending should continue through the next couple of years – and the increased
purchasing power of the Canadian dollar makes it easier to finance the acquisition of these
goods (since most are imported from the US).

Several external factors also supported Canadian exports through the past year. Perhaps most
important is that stronger US and overseas demand has partially offset the negative impact of
the dollar’s appreciation. Secondly, higher commodity prices have boosted the bottom line for
exporters of resource-based goods. A third factor stems from increasing globalization in recent
years. Canadian companies now import a much larger share of the inputs used in their
production processes. The import content used to make Canadian exports now averages
around 35%, and in many manufacturing industries the ratio is 50% or more. A higher dollar
means Canadian exporters are importing these inputs at a lower cost, which helps to maintain
cost competitiveness.

EDC’s role in facilitating trade and foreign direct investment

Against the positive backdrop for the global economy, EDC carried out $57.4 billion in
international trade and investment transactions on behalf of Canadian companies during 2005,
an increase of 4.6% over 2004. Many Canadian companies continue to invest in global supply
chains and distribution networks in order to increase productivity, reduce costs and remain
competitive. Recognizing the importance of this business strategy and its benefits to the
Canadian economy, EDC facilitated $2.3 billion in new outbound FDI during 2005, a large
increase over the $1.8 billion FDI outflow supported in 2004.

Chart 2: EDC support for Canadian exports levels off after big gains in 2001-02
EDC international business volume as a per cent of Canadian exports
16
15 Total Exports
14 Excl. Energy
13
12
11
10
9
8
7
6
1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: EDC Economics.

In 1997, EDC’s international business volume facilitated about 8% of Canada's total exports of
goods and services. By 2005, this share had reached 12%. However, recent years have seen
a leveling in the share of Canadian exports supported by EDC, following big gains in 2001 and
2002 (Chart 2). There are a couple of reasons to help explain this. First, the run-up in the
Canadian dollar from 2003 to 2005 reduced measured EDC business volumes (a pure
arithmetical impact resulting from the conversion of EDC’s USD-denominated business into

Canadian Benefits Scorecard – 2005 2

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Canadian dollars). In addition, the world economy recovered strongly from 2003 to 2005 – a
situation which reduced global risk and subsequently, lowered the demand for financial risk
intermediation. Also important here are the large gains in Canadian energy exports (crude oil,
natural gas, coal and electricity) during the past three years. Excluding crude energy products
from the picture – an area where EDC conducts little business – shows EDC support for
Canadian exports continued to edge higher in 2005, reaching almost 15% of total non-energy
exports (Chart 2).

In 2005, EDC executed transactions on behalf of 6,828 Canadian companies, a drop of 1.9%
from 2004 but maintaining the large gains from prior years.1 The drop in customers served
during 2005 was among small- and medium-sized enterprises (SMEs). EDC worked with 6,101
SMEs in 2005, a decline of 3.8% from the previous year. Smaller exporting companies are less
able to deal with the stronger Canadian dollar and this may have contributed to the drop in
EDC’s SME customers in 2005. Nevertheless, SMEs still constitute the bulk of Canadian
companies that use EDC’s services. Indeed, the total volume of SME transactions conducted
by EDC amounted to $15.5 billion in 2005, up 31% from 2004.

Continuing favourable credit and liquidity conditions pushed global foreign direct investment
(FDI) flows up by nearly 30% in 2005, to an estimated US$ 897.6 billion. Outbound FDI by
Canadian companies came in at $38 billion last year, which is down from the 2004 outflow but
still well above the historical average. FDI inflows to Canada amounted to almost $40 billion in
2005, well ahead of the $8.2 billion inflow recorded in 2004.

Reflecting the stronger global investment backdrop, EDC facilitated $2.3 billion in new Canadian
outward FDI last year – 23.8% more than in 2004.2 Including renewals of existing coverage,
EDC’s political risk insurance (PRI), project finance programs and other FDI support covered
$4.8 billion of Canadian overseas investment during 2005.

Boosting Canada’s presence in developing markets

EDC facilitated $13.3 billion in transactions in developing countries in 2005, a 15.3% rise over
2004. Canada’s overall exports of goods and services to developing markets increased by 10%
in 2005, reaching $35 billion. While higher commodity prices accounted for a large part of the
rise in the value of exports to emerging markets, the past year also saw strong export gains in
capital equipment, high-tech goods and consumer products. EDC facilitated one-third of total
Canadian exports of goods and services into these developing markets during 2005.

Moreover, the FDI into emerging markets supported by EDC will support future follow-on
exports from Canada to these countries. EDC facilitated $2.1 billion in new FDI to emerging
markets in 2005 compared with $1.5 billion in 2004. Total Canadian FDI flows to developing
countries are estimated at $11 billion in 2005, an increase of 10% over 2004.

Contributing to Canadian prosperity

By breaking down EDC’s business volumes by type of transaction and by industrial sector, we
estimate that the exports and FDI facilitated in 2005 helped generate $37.4 billion in Canadian

1
The numbers presented here refer to EDC’s direct and indirect customers. Direct customers served in 2005
amounted to 5,890 while the indirect customer tally was 938.
2
New Canadian outbound FDI is defined as new PRI policies and investment-related project finance. PRI renewals
are not classified as new FDI since they cover investments made in the past.

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GDP, an increase of almost 8% over the previous year.3 This contribution was on the order of
3.4% of Canada’s total GDP, in line with the results seen in 2004. The employment associated
with the business EDC facilitated in 2005 is estimated at 457,000 person-years, about 2.8% of
total national employment.

International trade and investment transactions provide benefits to the Canadian exporter or
investor as well as the foreign recipient. EDC Economics has developed a methodology to
estimate these foreign country benefits. In 2005, the trade and investment facilitated by EDC
supported an estimated US$ 45 to 50 billion in foreign GDP spread across 171 countries.
Foreign benefits tend to exceed domestic benefits because the gains from trade for developing
markets are generally greater than for developed economies like Canada.

Generating increased export sales and helping companies build out global procurement and
distribution networks (through FDI facilitation) enables companies to invest more in R&D
activities in Canada, which confers long-term benefits to the economy. In 2005, the average
R&D intensity across EDC’s business experienced an increase of 6.3%4. This represents the
second up year since the 2001 tech wreck. The largest gains last year were seen in aerospace,
telecom equipment, electronics manufacturing and refined petroleum products. These sectors
still account for one-quarter of private-sector R&D in Canada, but in 2005 EDC increased its
business in several other sectors that also perform a fair amount of R&D, including software,
instrumentation, and the automotive industry.

Canadian exports will see steady growth during 2006

Modest export growth is expected to continue through the coming year. Canadian exports of
goods and services are expected to rise by 3 to 4% in 2006 after last year’s increase of 5.3%
(and a rise of 8% in 2004). The easing in Canadian export growth in 2005 and into 2006
reflects the gradual slowing in the global economy – a trend expected to continue through 2007.

Investment in foreign economies may not exceed the large outflows experienced in the past
couple of years, but FDI-out is likely to remain above the historical average in 2006. EDC’s
Trade Confidence survey supports this view of an easing in FDI outflows. The Fall 2005 TCI
report showed that 19% of the companies surveyed have or plan to have direct investment in
foreign countries – compared with 25% in the Spring 2005 survey. The decline in outward
investment plans was concentrated entirely among small and medium-sized companies.
Indeed, the Fall survey showed that 42% of large Canadian companies plan to increase their
presence abroad through the use of FDI, up slightly from 41% in the Spring. Canadian
companies will continue to invest in their global production networks as they seek to reduce
costs and remain competitive.

3
The rise in contribution to GDP during 2005 stems primarily from the increase in outbound FDI supported by EDC,
particularly to emerging markets. Outbound FDI has a disproportionate impact on GDP since each $1 of FDI to a
developing county is estimated to generate at least $2 in follow-on exports over time.
4
R&D intensity measures the amount spent on R&D relative to overall output in that industry.

Canadian Benefits Scorecard – 2005 4

EDC Economics