IFIS index for the fourth quarter of 2018: Continuation of the stable domestic financial conditions trend, while foreign financial conditions continue to tighten

In the last quarter of 2018, the financial conditions trend did not deviate substantially when compared with the rest of the year. A relatively stable index trend in 2018 followed after a strong mitigation of the financial conditions during 2016 and 2017. Interest rates on loans and deposits as well as short-term interests on the interbank market have been registering either a stable trend or a mild decrease when compared to the last quarter. The liquidity of the financial system is on traditionally high levels; moreover, an additional increase has been registered in December. The stable trend of the credit default swaps continued until the end of the year, while the borrowing conditions additionally improved in the last quarter of 2018. It is interesting to note that the favorable domestic trend kept the financial conditions on a stable path in the last quarter of 2018 despite the strong turn of the foreign index component toward a tightening of financial conditions. Such trend, demonstrated by the foreign component, is predominantly under the influence of a strong increase of credit default swaps of the parent banks, which was recorded throughout the second half of 2018 and was influenced by political developments in Italy and an increase in Italian government bond yields. The tightening of the financial conditions on the foreign market was also affected by the rise of global volatility in the last quarter of 2018 due to tensions caused by trade negotiations between USA and China, concern over global growth slowdown, and future FED actions.

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.