A Financial Conditions Index for South Africa

IMF Working Papers, August 1, 2012

Source details

Main purpose: construct a financial conditions index (FCI) for South Africa.
Approaches used:
- Principal component analysis (PCA).
- Kalman filter.
Both approaches identify an unobservable common factor from a group of external and domestic financial indicators.

The alternative estimated FCIs share a similar trajectory over time.
The FCIs provide powerful predictive information for near-term GDP growth (up to four quarters).
The FCIs outperform:
- the South African Reserve Bank’s (SARB) leading indicator, and
- individual financial variables.

Recent dynamics summarized:
- Following a strong recovery in late-2009 and 2010, partly reflecting systematic reductions in the policy rate, the rebound in real economic activity, and a benign inflationary environment, financial conditions have deteriorated in recent months.
- The deterioration has not been as sharp as in end-2008.
Policy-relevant implication:
- Given the FCIs’ relatively high predictive power regarding GDP growth, a further deterioration may imply that economic activity is likely to slow in the period ahead.

Source: IMF Working Paper — "A Financial Conditions Index for South Africa" by Nombulelo Gumata, Eliphas Ndou, and Nir Klein (August 1, 2012).