The South African Reserve Bank published a Financial Stability Department topical briefing analysing how global geopolitical risk (GPR) shocks transmit to small open emerging market economies through the sovereign risk premium and banks’ balance sheets, and how different policy mixes perform. The paper finds that a positive GPR shock is inflationary and depreciationary, weakens aggregate demand, tightens financial conditions, and erodes bank net worth, leading to a contraction in credit, while macroprudential policy can stabilise credit, investment and output but creates an inflation-output trade-off. Empirically, regressions of Emerging Markets Bond Index Global (EMBIG) spreads on the global GPR index suggest the relationship is generally positive but heterogeneous across markets, with significant positive coefficients reported for South Africa (0.33), Brazil (0.64) and India (0.005). In the calibrated DSGE model, GPR enters via the uncovered interest parity condition by raising the foreign borrowing rate and risk premium, amplifying the downturn through a bank balance sheet channel. Policy experiments comparing a standard Taylor rule with a Taylor rule augmented by a countercyclical capital requirement rule show the macroprudential overlay dampens the fall in credit, investment and output by relaxing domestic borrowing constraints, but raises inflation and policy rates and deepens the decline in consumption. Loss-function optimisation points to a strict inflation response in monetary policy (inflation coefficient at 3.00 and output coefficient at 0.00), with an additional macroprudential rule materially lowering the model’s loss versus the standard Taylor rule (for equal weights, 773.96 under the standard Taylor rule versus 181.33 under the combined rule). Alternative experiments indicate capital flow management policies can also stabilise outcomes but deliver higher loss than macroprudential policy under the same weighting schemes. The paper notes several caveats, including that the model is loosely calibrated rather than estimated, GPR is modelled as an exogenous shock entering through the country risk premium, and the framework abstracts from other asset-price channels such as equities.
South African Reserve Bank 2026-03-19
South African Reserve Bank research shows macroprudential policy can cushion credit and output from geopolitical risk shocks
The South African Reserve Bank's Financial Stability Department briefing highlights how global geopolitical risk (GPR) shocks impact small open emerging market economies, affecting sovereign risk premiums and banks' balance sheets. GPR shocks are inflationary, depreciate currencies, weaken demand, and tighten financial conditions. Macroprudential policies stabilize credit and output but create an inflation-output trade-off. Empirical analysis shows a positive relationship between GPR and Emerging Markets Bond Index Global spreads, with significant coefficients for South Africa, Brazil, and India.