Updating the SARB Index of Commodity Prices

Hannah de Nobrega, Johannes Coetsee, Ferreira Mg and Rowan Walter

No 11053, Occasional Bulletin of Economic Notes from South African Reserve Bank

Abstract: Elevated commodity prices cushioned the South African economy from structural challenges when the prices of key export commodities such as rhodium, palladium, thermal coal, and iron-ore surged. They helped lift the SARB Index of Commodity Prices (ICP) higher from mid-2020, keeping it elevated until late 2022. Accurately capturing the movements in these globally determined prices is integral to describing the extent to which commodity prices play this cushioning role. The SARB ICP is a valuable tool with which to track the impact of price changes on the South African economy. It is used as an assumption in the SARBs models and is often referred to in terms of trade, balance of payments and tax revenue discussions. As the Previous ICP calculation relied on SARS export values when weighting the commodity components, the price surges in rhodium and palladium alone would have raised the index beyond reasonable levels if it was merely updated and not methodologically revised. This is despite the forward-looking approach of anchoring future prices to a lower long-run average level. This previous calculation method - in combination with the internal structure of the weights - would bias the index upward. The above, as well as a general surveying of the previous basket composition (that considered data availability and overall contributions to exports), necessitated the following revisions to the ICP: Calculation: Updated to a Laspeyres methodology with index weights based on 2019, the most recent relatively normal year. This is to mitigate the exacerbating effect of using export values as weights. Composition: The Updated ICP now consists of 21 commodities with 21 underlying weights. Excluded commodities are vanadium, titanium, ferromanganese, and coking coal (either weight and or data-related exclusions). Newly included commodities are iridium and ruthenium.

Date: 2024-04-25
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