IMF Working Papers

A Financial Conditions Index for South Africa

Author/Editor:

Nombulelo Gumata ; Eliphas Ndou ; Nir Klein

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. 2012/196

Subject:

Cyclical indicators Economic and financial statistics Economic growth Financial conditions index Financial crises Financial sector policy and analysis Financial statistics Post-clearance customs audit Revenue administration