Falling loonie is the world’s way of doing us a favour
TheStar.com – Business/Economy – When you are globally regarded as a resource economy, and resources plunge in price, as they have, the value of your currency will drop accordingly.
Jan 10 2014. By: David Olive
As the loonie explores new depths each day, it seems – slumping to a three-year low of 92.56 cents (U.S.) on Wednesday – it’s tempting to be wistful about the years when the loonie was above parity against the greenback.
Better, though, that we figure out what the world is telling us by devaluing our currency.
The loonie has long been over-valued.
Like any commodity, the loonie’s value is determined by supply and demand. Until recently, demand for the Canadian dollar over the past decade has been unprecedented, driving its value upward.
The strength of Canada’s public finances – 11 consecutive years of federal surpluses ahead of the Great Recession, a record unmatched elsewhere among major economies – eventually caught the eye of global currency traders seeking sound currencies backed by sound public finances.
At the same time, in the 2000s, Canada earned international recognition as the world’s second-largest source of oil reserves, trailing only Saudi Arabia. Again, the largely foreign-financed rush to develop the Athabasca treasure house required offshore investors to purchase loonies to make the multibillion-dollar investments in new and expanded Alberta oilsands projects. The resulting increased demand for Canadian dollars put still more upward pressure on the loonie’s value.
The previous decade was also marked by Ottawa’s benign regard for offshore takeovers of Canadian industrial assets, in what seemed like a yard sale of iconic names including Alcan Inc., Inco Ltd., Falconbridge Ltd. (including its fabled Noranda assets), Stelco Inc., Dofasco Ltd. and others. Again, these acquisitions required the offshore buyers to purchase loonies to finance the deals, keeping demand and thus the price of the loonie high.
Come the Wall Street meltdown of 2008-09, the strength of Canada’s financial sector in comparison with the urgent need for government bailouts in every other major economy reinforced Canada’s reputation as a “safe harbour” for offshore funds, as Toronto earned distinction as one of the world 10 most influential financial centres.
Finally, the past decade has been marked by a commodities boom. And Canada, for all its efforts to evolve into a more balanced economy, remains a resource-based, export-driven economy. Certainly it is perceived that way by the global currency traders who help set the loonie’s price on world markets.
The tables are turned.
The conditions listed above were, in the main, unsustainable.
The pace of foreign direct investment (FDI) spending in Canada began to slow. As the U.S. began showing signs of energy self-sufficiency with its shale gas and shale oil booms, questions arose about the demand for Athabasca oil, which is among the world’s costliest oil to extract and refine. Doubts grew about the proposed pipeline mega-projects that would be required to get the oil of landlocked Athabasca to world markets.
In any case, the world boom in commodities, on which our economy is still unduly reliant, began to fade. The most recent reports on the loonie’s sharp decline invariably cite the drop in world prices for our oil and gold (down 38 per cent and 36 per cent, respectively, from their all-time peaks).
But the commodities malaise is more widespread than that. Demand and prices for Canada’s endowment of base metals has declined along with precious metals. Copper, for instance – in such demand in the 2000s that vandals stripped abandoned buildings of copper wire to sell on the black market – has dropped 13 per cent in price in the past 12 months. Corn prices have fallen by 45 per cent in that time, and wheat commands 27 per cent less per bushel than a year ago.
When you are globally regarded as a resource economy, and resources plunge in price, as they have, the value of your currency will dropaccordingly, as the loonie is doing.
And Canada is no longer quite as welcoming of foreign investment than it was. The Harper government has quashed three proposed major offshore takeovers – the first three in history. Citing national security concerns, Stephen Harper is also discouraging energy investments by state-controlled Chinese enterprises.
Canada’s comparative “safe haven” status has eroded as the U.S. economy has begun to rebound, and Europe has at least stabilized if not yet returned to brisk recovery.
A dynamic opposite that of the 2000s is now at work. The sentiment of global investors seeking maximum returns is to get in on the ground floor of the recoveries now perceived to be in store in U.S. and E.U. jurisdictions where investments can be made at bargain prices.
As a minor currency in limited supply, the loonie requires not that much increased demand to soar in price. By the same token, as a thinly traded currency, the loonie suffers sharp declines as offshore demand for it wanes.
Chronic woes disguised by the high loonie.
Heading the list of Canadian economic shortcomings is Canada’s sadly anemic export growth, which has been essentially stagnant for 14 years.
To be sure, a high-priced loonie helped impede export growth. But productivity growth is the much bigger culprit, with gains only half that of the U.S. in recent years.
Canada’s branch-plant economy and its locally owned businesses have continued their long tradition of under-investing in productivity; innovation in new products and more efficient ways of making them; employee training and skills upgrades; and making the determined effort required to crack new world markets. That would finally reduce our continued over-reliance on a slow-growth U.S. market. By now we should have become present and accounted for in the high-growth markets of the Pacific Rim, South Asia and Latin America.
To end on an encouraging note, as recently as the early 1970s, remote Canada was the world’s second-favourite tourism destination, after Italy. Yet in the midst of the current boom in world tourism, Canada, currently ranked 18th, barely counts among leading tourism destinations. Canada has suffered a 20 per drop in international visitors since 2000.
Studies have long shown that business travelers to Canada return home and begin looking for Canadian goods to buy, and make plans for Canadian investments. We live in that kind of country: To see it is to love it. So why don’t we use our diplomatic missions abroad as showcases for Canadian innovations in technology, industrial goods and culture? It’s embarrassing that among our inept tourism practices is something so easy to fix as our slothful processing of visas.
As a psychological matter, it’s no fun to see the world tangibly devaluing one’s country along with its currency. But in its way the world is doing us a favour. The sagging loonie is compelling cause to re-examine how we manage our economy, so that the next upturn in the Canadian dollar is a sustainable one.
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