A Financial Conditions Index for South Africa

Nombulelo Gumata, Eliphas Ndou and Nir Klein

No 2012/196, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; financial condition; Kalman FCIs; GDP; Financial conditions index; factor analysis; financial conditions indicator; explanatory power; paper constructs FCI; volatility index; PCA index; alternatives Financial conditions index; estimated Financial Conditions Indices; tighter financial conditions; restrictive financial conditions; PCA-based FCI; stock price index; JP Morgan EMBI total return index; Cyclical indicators; Financial statistics; Post-clearance customs audit; Africa; Global (search for similar items in EconPapers)
Pages: 20
Date: 2012-08-01
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Citations: View citations in EconPapers (18)

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