Gauging financial conditions in South Africa
Stellenbosch Working Paper Series No. WP10/2016Publication date: 2016
Author(s):
This paper investigates the relevance of financial conditions indices (FCIs) as an additional gauge of South Africa’s economic metabolism. As a starting point, a background is provided on FCIs in terms of evolution, methodologies and uses. In general, FCIs were found to have a very broad definition, are used for different purposes and can be calculated with different statistical techniques. The first step in developing an FCI for South Africa was to identify a purpose for it. From the purpose followed the data selection, sourced from regular updated financial data since 2003. The selection was differentiated from other South Afri-can FCIs by including commodity prices, as well as BER financial survey data. The final selection of indicators was tested for unit roots. The second process was the calculation of weights, in which case the principle components method was used. However, to avoid revising the historical data of the FCI each new month, a real-time principle component series was constructed. This method implies that the weights are recalculated every month, based on a rolling window of 60 months historical data, starting from 2005 onwards. In the third and final step, the real-time principle component series was purged from the real-time nominal GDP growth rate (capturing both output and inflation). The purged real-time principle component series was taken as the final FCI. The impact of the global financial crisis and the drastic monetary policy that followed is clearly visible in the FCI. The periodical divergence between the FCI and the real economy also served as an indication on the effectiveness of monetary policy. This FCI was found, over shorter horizons, to lead economic growth by nine months, and it improved on a naive forecast of GDP growth.
JEL Classification:G19, E39, C10
Keywords:financial conditions, principle components, factor models, leading indicator, financial survey, business cycle
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Upcoming Seminars
Monday 21 July 202512:00-13:00
Izak Odendaal: Old Mutual Wealth Chief Investment Strategist
Topic: "Diverging fiscal policies and what it means for markets"
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Topic: "Two competing approaches in South African competition policy: merger control and anti-cartel enforcement over the past 30 years"
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27 Jun 2025 Another setback for the GNU, but oil markets breathe a little easierThis week was marked by heightened tensions both domestically and internationally. At home, friction intensified between the two largest parties in the Government of National Unity (GNU), the ANC and the DA, following the firing of one of the DA's deputy ministers. Internationally, the US conducted airstrikes on three Iranian nuclear facilities using...
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