A Financial Conditions Index for South Africa

By Nombulelo Gumata, Eliphas Ndou, Nir Klein

August 1, 2012

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Nombulelo Gumata, Eliphas Ndou, and Nir Klein. A Financial Conditions Index for South Africa, (USA: International Monetary Fund, 2012) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

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

Keywords: Africa, Alternatives Financial conditions index, Cyclical indicators, Estimated Financial Conditions Indices, Explanatory power, Factor analysis, Financial condition, Financial conditions index, Financial conditions indicator, Financial statistics, GDP, Global, JP Morgan EMBI total return index, Kalman FCIs, Paper constructs FCI, PCA index, PCA-based FCI, Post-clearance customs audit, Restrictive financial conditions, Stock price index, Tighter financial conditions, Volatility index, WP

Publication Details

Pages:

20
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/196
Stock No:

WPIEA2012196
ISBN:

9781475505450
ISSN:

1018-5941

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