By Tiyiselani Precious Miyambu

Global financial conditions have a significant effect on the stability of the South African economy, according to a recent study by two researchers from the North-West University (NWU).

In their study on the influence of global financial cycles on South Africa’s financial cycle, Prof Precious Mncayi Makhanya and Khwazi Magubane from the School of Economic Sciences on the NWU’s Vanderbijlpark campus, examined the impact of global capital flows, asset prices and investor risk sentiment.

“A 1% change in the global financial cycle results in a 20% change in South Africa’s financial cycle over time,” says Khwazi. “This indicates that the country’s financial system is more responsive to global financial conditions than to domestic economic variables such as GDP growth, inflation, or interest rates.”

When global financial conditions improve, South Africa experiences a surge in capital inflows, credit availability and rising asset prices, Khwazi adds. “Conversely, during periods of global financial distress, capital outflows and tightening financial conditions affect domestic financial activity.”

Examining the impact of monetary policy

The study also explored how monetary policy influences financial stability. It found that high interest rates and inflation tend to suppress financial activity by reducing credit expansion and investment. “Higher interest rates and inflation reduce financial activity,” Khwazi says.

The researchers note the dual impact of the set of policies that aim to protect and strengthen the financial system and its stability (macroprudential policies). While these policies have sometimes helped stabilise financial conditions, they have also restricted economic growth.

“The South African financial cycle rises following a shock in global financial conditions,” Khwazi adds, explaining that given South Africa’s integration into global financial markets, the researchers emphasise the importance of monitoring international financial trends when formulating domestic policies.

“Adaptive macroprudential measures can help mitigate external shocks. These measures could include adjusting capital requirements for banks, managing currency reserves, and coordinating policies with global financial institutions to prevent irresolution.

Greater engagement needed with global financial networks

The study underscores the role of international financial institutions in managing the risks associated with financial globalisation. The researchers stress the need for South Africa to enhance economic resilience by strengthening its engagement with global financial frameworks.

“With global financial trends applying an influence on South Africa’s economy, policymakers must balance external financial pressures with domestic economic priorities,” Khwazi concludes.

Prof Precious Mncayi Makhanya

Khwazi Magubane