Abstract
This paper analyses the spillover effects of external financial conditions onto
South Africa using quarterly domestic and international data from 1996Q1 to 2014Q4.
First, principal component analysis and vector autoregressive model are utilized to build
financial conditions indices for South Africa and its main trading partners, namely, China,
Germany, the United States, Japan, the United King, Netherlands, Italy, France and
Belgium. Consistently across both methodologies, the financial conditions indices
obtained track each other fairly well and capture the 2008/09 global financial crisis.
Second, a Global Vector Autoregressive model comprised of financial indices and other
macroeconomic variables is implemented to assess how international financial shocks
spillover into South Africa. Our findings show that a sudden tightening of the US financial
conditions has a significant but short lived effect on the South Africa’s real GDP growth
while the spillover effects from other trading partners appear to be of negligible impact
throughout the sample period.