A Financial Conditions Index for South Africa

Author/Editor:

Eliphas Ndou ; Nir Klein ; Nombulelo Gumata

Publication Date:

August 1, 2012

Electronic Access:

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Summary:

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.

Series:

Working Paper No. 12/196

Subject:

English

Publication Date:

August 1, 2012

ISBN/ISSN:

9781475505450/1018-5941

Stock No:

WPIEA2012196

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

20

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