IFIS for the third quarter of 2018: Stabilization of the financial conditions trend

The first three quarters of 2018 brought a stabilization of the Croatian financial conditions trend. Namely, after a relatively strong mitigation of financial conditions throughout 2016 and 2017, the mitigation trend has almost completely ceased in 2018. However, although the overall financial conditions trend seems stable, individual components of the financial conditions index reveal dynamic movements. Compared to the second quarter of 2018, the third quarter of 2018 registered a decrease in interest rates on deposits and loans and an increase in short-term interests on the banking market, while the liquidity of the financial system―although still at high levels―strongly declined. Additionally, credit default swaps have also decreased due to Fitch Ratings’ credit rating upgrade from stable to positive (BB+). Overall, even though the foreign component of the index also shows a stable trend in the third quarter of 2018, individual foreign components of the financial conditions index indicate a relatively high volatility as well. Strong tightening of financial conditions is visible in the increase of credit default swaps of the parent banks, which was affected by the political developments in Italy and an increase in Italian government bond yields. The same events also contributed to a higher demand for German government bonds and a consequential decrease in yields.

 

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.