IFIS for the last quarter of 2021: Mild financial conditions for the end of the year

Financial conditions recorded an easing trend in the last quarter of 2021, with December 2021 seeing the mildest financial conditions in the entire period since the IFIS index has been monitored (since March 2005). A slight tightening of financial conditions was registered at the end of the third quarter of 2021 compared to the end of the second quarter, while the last significant tightening of the financial conditions index was recorded in February and March 2020, due to the occurrence and spreading of the pandemic caused by the SARS-CoV-2 virus. Financial conditions in the last quarter of 2021 were milder compared to the same period in 2020. Financing conditions remained favorable on the domestic market, while the domestic financial system liquidity reached its record level in December 2021. Favorable movements on world markets continued in the last quarter of 2021, despite the risks of interest rate growth and the occurrence and spreading of the Omicron variant of the SARS-CoV-2 virus. Nevertheless, the foreign index component recorded a mild tightening of financial conditions in December 2021. Overnight interest rate on the banking market of the euro area (EONIA) continued to register a slight increase in the last quarter of 2021, as did credit default swaps of parent banks.

Financial conditions in the first quarter of 2022 will certainly be marked by uncertainties linked to the Russian invasion of Ukraine, which besides the significant humanitarian impact, also has numerous financial and economic implications resulting from the economic sanctions imposed on Russia, a possible Russian debt default on financial markets, and disruptions to global supply chains and international trade. Strong inflationary pressures inherited from the end of 2021 have been compounded by the energy and raw materials price surge caused by the conflict and ensuing sanctions against Russia. An additional source of uncertainty is sustainability of debt, which depends on the speed of economic recovery and the level of real interest rates. On a positive note, the negative impact of the Omicron variant of the SARS-CoV-2 virus is expected to decrease in 2022, which could stimulate 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.