A Financial Conditions Index for South Africa

21 Pages Posted: 1 Nov 2012

See all articles by Nombulelo Gumata

Nombulelo Gumata

affiliation not provided to SSRN

Nir Klein

International Monetary Fund (IMF)

Eliphas Ndou

affiliation not provided to SSRN

Date Written: August 2012

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: Financial Conditions Index, Factor Analysis, Economic Conditions, Economic Growth, Economic Indicators, Economic Models, Monetary Policy

JEL Classification: E17, E44

Suggested Citation

Gumata, Nombulelo and Klein, Nir and Ndou, Eliphas, A Financial Conditions Index for South Africa (August 2012). IMF Working Paper No. 12/196, Available at SSRN: https://ssrn.com/abstract=2169742

Nombulelo Gumata (Contact Author)

affiliation not provided to SSRN

No Address Available

Nir Klein

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Eliphas Ndou

affiliation not provided to SSRN

No Address Available

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