IFIS for the fourth quarter of 2019: Continued mild financial conditions mark the end of 2019

In the fourth quarter of 2019, financial conditions continued with the mitigation trend, which has been present throughout the year. Mitigation of financial conditions in 2019 followed after the index stabilized in 2018, and is the consequence of domestic and foreign factors movements. Compared to the final quarter of 2018, interest rates on loans and deposits, as well as short-term interests on the interbank market, have been registering a decrease. Better borrowing conditions for the Republic of Croatia throughout entire 2019 contributed to this decrease. Traditionally high level of liquidity of the domestic financial system additionally increased in the last quarter of 2019. Mitigation of foreign financial conditions, characteristic of the rest of 2019, continued in the last quarter of 2019, following a strong tightening in the last quarter of 2018 amid volatility on financial markets and tensions caused by trade negotiations between the USA and China. Favorable movements on world trade markets had a positive influence on improved foreign financial conditions in the fourth quarter of 2019. The fourth quarter also registered an additional drop in German government bond yields, as well as a drop in credit default swaps of the parent banks, which also had a favorable impact on mitigating the foreign component of the financial conditions index. Apart from challenges inherited from last year, such as geo-political tensions and slower growth, it is expected that consequences of the outbreak and spreading of the coronavirus will also considerably impact the global financial conditions in 2020.

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.