IFIS for the fourth quarter of 2020: Continued easing of financial conditions marks the end of 2020

The financial conditions index movements suggest that the financial conditions in the country continued to ease in the last quarter of 2020. The easing trend in financial conditions, which has been lasting since the second quarter of 2020, followed a sudden tightening of financing conditions in February and March 2020, due to the outbreak and spreading of the COVID-19 pandemic. Both the domestic and foreign index components eased in the fourth quarter. The easing of domestic financing conditions resulted, among other things, from a drop in interest rates on loans and deposits. The Croatian National Bank continued to increase the degree of monetary policy expansivity, so the traditionally high level of liquidity of the domestic financial system reached record levels in the fourth quarter. The easing of the foreign index component was influenced by favorable trends on world trade markets and by a continued decrease in credit default swaps of parent banks, which rose sharply in the first quarter of 2020 due to the health and economic crisis that occurred in Italy because of the pandemic.

Domestic and foreign financial conditions in 2021 will continue to be strongly influenced by uncertainties linked to the spread of the coronavirus, currently burdened by the emergence of new variants. A significant source of uncertainty are the availability and dynamics of vaccination, considering that the production and distribution of the vaccine are currently a logistically complex issue that is slowing down vaccination efforts. Additional vulnerabilities could be expected due to increased levels of debt that countries are experiencing as the result of introducing different measures to help their economies. Debt sustainability will depend on the speed of economic recovery and level of real interest rates.
 

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.