Harper’s Free-Market Views Tested by Canada’s Capital Inflows
Canada's Prime Minister Stephen Harper
Victor J. Blue/Bloomberg
Canada's prime minister Stephen Harper, right, listens during a Bloomberg Television interview in New York.
Canada's prime minister Stephen Harper, right, listens during a Bloomberg Television interview in New York. Photographer: Victor J. Blue/Bloomberg
Canadian Prime Minister Stephen Harper, an economist who has pursued free-trade agreements from Costa Rica to India, is prepared to stem capital flows if they jeopardize domestic control of key industries or fuel speculative currency gains.
Harper said he will “proceed with caution” when it comes to foreign takeovers of important companies, even as he seeks to encourage business spending to generate growth. Policy makers also won’t tolerate a speculative jump in the country’s dollar that could hurt the economy, Harper said in an interview yesterday at Bloomberg’s headquarters in New York.
“As much of an advocate as I am of free markets, I don’t think that governments realistically can just make the assumption that everybody else is operating on a market basis,” Harper said, referring to foreign investment. Canada can’t assume “that the country’s only interest would be in simply letting the so-called market, which isn’t always a free market, decide all these things.”
Harper is dealing with the impact of record capital inflows at a time when other countries have been implementing investment controls or trying to offset upward pressure on their currencies. Harper, 52, is also trying to balance encouraging foreign investment while ensuring the country maintains control over its resources amid emerging market demand for Canada’s commodities.
“Canada can’t afford to go protectionist if it wants to become an energy superpower,” said Goldy Hyder, a general manager with lobby firm Hill & Knowlton Canada who was an aide to former Conservative Prime Minister Joe Clark. “But he’s reminding people that this isn’t going to be a garage sale. These deals need to make sense for Canada.”
Freeing Foreign Investment
The Canadian government is looking at ways to liberalize foreign investment in various industries, Harper said in the interview. The challenge is to ensure that the loosening of foreign-ownership rules doesn’t trigger the “loss of all Canadian presence in the sector,” he said.
“The important issue for me is that Canada continue to have head offices and some economic leadership in the world,” Harper said. “I don’t think we would want a situation, especially one that might not be driven entirely by market forces, where the Canadian economy were entirely owned and operated essentially from headquarters and offices based in every place but Canada.”
Almost half of the country’s top 20 companies by market value, including Toronto-based Royal Bank of Canada (RY) and BCE Inc. (BCE), the Montreal-based phone company, are subject to ownership limits.
Majority Government
Harper’s Conservative government - which won a majority of seats in May elections after five years of minority rule - has taken steps to encourage businesses to invest in Canada. The government has pressed ahead with cuts in the corporate tax rate, eliminated all tariffs on imported machinery and equipment for manufacturing, and is allowing manufacturers temporary tax breaks on investments.
The country’s record on generating foreign direct investment remains mixed. Canadian direct investment abroad has outpaced foreign direct investment in Canada by a quarterly average of C$3.7 billion over the past 14 quarters.
Harper has tried to reassure potential investors that Canada remains open to foreign takeovers since the government in November rejected a proposed bid for fertilizer maker Potash Corp. of Saskatchewan Inc. by Australia-based BHP Billiton Ltd. (BHP)
‘Strategic Positioning’
“If it had been in Australia, to put the shoe on the other foot, I don’t believe that takeover would have been approved,” he said. “I think the objectives of BHP, in fairness, probably were beyond merely what we would consider good business in a market sense, but probably more an issue of strategic positioning, and that strategic positioning was obviously not in the interest of the Canadian economy.”
The government welcomes investment by China and other countries, as long as such acquisitions are “economic in nature and don’t have other strategic or political objectives,” he added.
Harper also has been an advocate of the country’s energy industry, which is forecast to bring C$2.08 trillion in investment over the next 25 years, the Canadian Energy Research Institute estimates.
To secure those investments, Harper’s government has been promoting Alberta’s oil sands as a source of energy for the U.S., over the objections of environmentalists who say their output requires extensive upgrading and refining in a process that generates more greenhouse-gas emissions than conventional crude production.
Keystone Pipeline
TransCanada Corp. is awaiting approval from the U.S. State Department for the Keystone XL pipeline, which would transport crude from the oil sands to U.S. refineries near the Gulf of Mexico.
Harper said U.S. approval of TransCanada’s proposed $7 billion pipeline is a “no-brainer” because it will create jobs and add to America’s secure energy reserves.
“The need for energy in the U.S. is enormous, the alternatives for the U.S. are not good, on every level,” Harper said in an interview on Bloomberg Television. Harper said he’s “confident” the pipeline will be built.
Foreign investors have bought record amounts of bonds in the past two years, helping to support a Canadian dollar that has risen more than 60 percent against the U.S. currency since 2002. The appreciation has hurt the profitability of companies such as Guelph, Ontario-based auto-parts maker Linamar Corp. (LNR), and the share of exports in national output has fallen more than 10 percentage points over the past decade.
‘Positive Reflection’
Harper said that the currency’s strengthening over the past decade has been “to a large degree a positive reflection on the country’s economic state and its economic policies.” He added policy makers are prepared to act to stem an appreciation caused by speculative capital inflows that could undermine the economy.
Canadian monetary authorities “would be prepared to intervene if they thought there were movements in the currency that were contrary to the country’s interests and not being driven by actual underlying fundamentals,” Harper said in the interview.
Harper said he doesn’t want to see another “speculative spike” like the one in 2007, when the currency rose to a record high of about $1.10. The Canadian dollar depreciated 1.6 percent yesterday to C$1.0081 per U.S. dollar, from 99.27 cents the day before.
“We did have a speculative spike on the currency I think in 2007 and as you know I did eventually express my concern about,” Harper said. “I would not want to see an incident like that repeated. I don’t believe under the Bank of Canada today it would be repeated.”
To contact the reporters on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net, Andrew Mayeda in Ottawa at amayeda@bloomberg.net.
To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net.
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