IFIS for the second quarter of 2020: Repeated mitigation of financial conditions

In the second quarter of 2020, the financial conditions eased after sudden tightening in the first quarter of this year, which ensued after a mitigation trend was present throughout 2019. Tightening of financial conditions started in February 2020 and additionally accelerated in March, due to the outbreak and spreading of COVID-19 pandemic. IFIS index for the second quarter of 2020 shows that financial conditions eased already in April compared to March. Mitigation of financial conditions in the second quarter was under the influence of domestic and foreign index components. After an extraordinary volatility growth at world markets and disinvestment in the first quarter, the second quarter registered a mild recovery at world markets, which contributed to mitigation of foreign financial conditions. Mitigation trend of foreign conditions in the second quarter was also triggered by measures which leading central banks took in order to keep favorable financial conditions and stabilize international financial markets. Croatian National Bank adopted a similar approach and started, already at the end of the first quarter, with a number of monetary policy measures with the aim of preserving exchange rate stability, favorable financial conditions and financial system stability. Traditionally high level of liquidity of the domestic financial market rose additionally in the second quarter.
Compared to the first quarter of 2020, growth of interest rates on loans included in the calculation of the index has been recorded. State credit risk was, at the end of the second quarter, still relatively low, due to favorable financial conditions, but also to the announcement of financial means that would be available from European funds for financing the repair of economic damage caused by the COVID-19 pandemic. The second quarter also registered a drop in credit default swaps of the parent banks, which rose sharply in the first quarter due to the health and economic crisis that occurred in Italy as a consequence of the pandemic.

Domestic and foreign financial conditions will be, by the end of this year, strongly influenced by consequences of the outbreak and spreading of the COVID-19 pandemic. Additional vulnerabilities could be expected due to deepened fiscal imbalances in EU states resulting from the introduction of various measures to aid the economies. Geopolitical tensions and the outcome of the US presidential elections, which will strongly affect global financial conditions in the second half of 2020, trigger additional uncertainties.


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.

Attached documents