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A Financial Conditions Index for South Africa

  • Nombulelo Gumata
  • Eliphas Ndou
  • Nir Klein
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    The main purpose of this paper is to construct a financial conditions index (FCI) for South Africa. The analysis extracts the index by applying two alternative approaches (principal component analysis and Kalman filter), which identify an unobservable common factor from a group of external and domestic financial indicators. The alternative estimated FCIs, which share a similar trajectory over time, seem to have a powerful predictive information for the near-term GDP growth (up to four quarters), and they outperform the South African Reserve Bank’s (SARB) leading indicator as well as individual financial variables. Their recent dynamics suggest that following a strong recovery in late-2009 and 2010, reflecting in part domestic factors such as systematic reductions in the policy rate, the rebound in real economic activity, and a benign inflationary environment, the financial conditions have deteriorated in recent months, though not as sharply as in end-2008. Given their relatively high predictive power regarding GDP growth, a further deterioration may imply that economic activity is likely to slow in the period ahead.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/196.

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    Length: 20
    Date of creation: 01 Aug 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/196
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    1. Jan Hatzius & Peter Hooper & Frederic S. Mishkin & Kermit L. Schoenholtz & Mark W. Watson, 2010. "Financial Conditions Indexes: A Fresh Look after the Financial Crisis," NBER Working Papers 16150, National Bureau of Economic Research, Inc.
    2. Carolina Osorio & D. Filiz Unsal & Runchana Pongsaparn, 2011. "A Quantitative Assessment of Financial Conditions in Asia," IMF Working Papers 11/170, International Monetary Fund.
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