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A Financial Conditions Index for South Africa

2012; International Monetary Fund; Volume: 12; Issue: 196 Linguagem: Inglês

10.5089/9781475505450.001

2227-8885

Nombulelo Gumata, Eliphas Ndou, Nir Klein,

Market Dynamics and Volatility

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.