IFIS index for the second quarter of 2019: Financial conditions continue to ease

In the second quarter of 2019, financial conditions continued to ease, which has been the trend throughout 2019. The mitigation of the financial conditions index occurred after the index stabilized in 2018. The easing of financial conditions in the second quarter of 2019 was recorded both in domestic and foreign factors. The mitigation of the domestic component of the index in the second quarter of 2019 is linked to additionally improved borrowing conditions for the Republic of Croatia. At the same time, interest rates on loans and deposits, as well as short-term interests on the inter-bank market, registered either stable movements or a mild decrease compared to the previous quarter. During the second quarter of 2019, the liquidity of the domestic financial system remained at traditionally high levels. Foreign financial conditions have also showed signs of easing in the first half of 2019, after a strong tightening in the last quarter of 2018 due to volatility on the financial markets and tensions caused by trade negotiations between the USA and China. The second quarter of 2019 saw an additional decrease in German government bond yields and in credit default swaps of parent banks, which favorably affected the mitigation of the foreign component of the financial conditions index.

 

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.