IFIS for the first quarter of 2019: Mitigation of financial conditions

The first quarter of 2019 brought new mitigation of financial conditions. Year 2018 was characterized by stabilization of the financial conditions index trend, which ensued after strong mitigation of financial conditions during 2016 and 2017. Domestic and foreign factors contributed to the mitigation of financial conditions in the first quarter of 2019. Interest rates on loans and deposits, as well as short-term interests on the inter-bank market, have been registering a mild decrease when compared to the previous quarter, while liquidity of the financial system remained at high levels. The stable trend of the credit default swaps continued at the beginning of 2019, while the borrowing conditions for the Republic of Croatia additionally improved in the first quarter of 2019. The foreign component of the financial conditions index also registered a mitigation trend in the first quarter of 2019, which represents a change compared to the strong turn of the foreign index component toward a tightening of financial conditions in the last quarter of 2018. A decrease in volatility in the first quarter of 2019 contributed to the change of trend towards mitigation of financial conditions on global markets, due to a favorable reaction of financial markets to lower concern over future FED and ECB actions and tensions caused by trade negotiations between USA and China. Credit default swaps of parent banks, which are affected by the political developments in Italy, considerably influenced the foreign component of the financial conditions index. Despite a mild decrease compared to the end of 2018, credit default swaps of parent banks remained on a high level in the first quarter of 2019. On the other hand, a higher demand for German government bonds brought a consequential decrease in yields and favorably affected mitigation of the foreign component of the financial conditions index in the first quarter of 2019.

What is IFIS? 

IFIS is a monthly financial conditions index developed by the Institute of Economics, Zagreb. It provides timely information on the average financial conditions in the economy which can serve as a significant determinant of projections and, consequently, of future economic activity. Financial conditions estimates can be useful for economic activity projections, macroeconomic policy evaluation and financial investment decisions.    
 

How is IFIS calculated?

Overall financial conditions are influenced by a number of variables. The variables are selected so as to reflect changes in the local and international financial environment, taking into consideration the specific features of the local market. To be able to estimate the developments in financial conditions based on the large clusters of variables, it is necessary to extract data from various parts of the financial system into a simple and easily understandable index. The IFIS index is calculated as the pondered average of variables that represent the fluctuations in the financial system, using the frequently applied method of principal components analysis. IFIS is standardized so that its arithmetic mean equals zero (which is the average index value in the entire observed period), while the standard deviation equals one. Positive values represent harsher financial conditions than the average, and negative ones represent milder financial conditions compared to the average. An increase in the index indicates harshening financial conditions, while a decrease indicates milder financial conditions.

The development of the IFIS index was supported by the EIZ Club, Agrokor, Atlantic and Privredna banka Zagreb.