IFIS for the first quarter of 2021: Mild financial conditions continue in the first quarter of 2021

In the first quarter of 2021, financial conditions continued with the mitigation trend which has been present since the second quarter of 2020. Tightening of financial conditions index was recorded the last time in February and March of 2020, due to the occurrence and spreading of the pandemic caused by the SARS-CoV-2 virus. The foreign index component registered additional easing in the first quarter of 2021 due to continued favorable movements at the world markets, favorable borrowing conditions and decreasing trend of credit default swaps of the parent banks. Domestic index component also indicates mild financial conditions in the first quarter of this year. Monetary policy has remained extremely accommodating, so that traditionally high liquidity of the domestic financial system reached its record levels in the first quarter.
 
It is expected that financial conditions will remain, throughout 2021, under the strong influence of uncertainty linked to the consequences and dynamics of the pandemic. Although various measures to aid the economy have contributed to easing the pandemic consequences, it should be kept in mind that increase in countries' indebtedness level has happened simultaneously. In that sense, a potential source of vulnerability is sustainability of debt, which will depend on the speed of economic recovery and the level of real interest rates. Although there are significant differences among countries in availability and dynamics of vaccination, the majority of countries have made improvements in vaccination, which will reflect positively on economic recovery.
 

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.