IFIS Index

IFIS index for the second quarter of 2017: Mildest financial conditions since the beginning of 2005
The values of the IFIS index continued to decrease in the second quarter, indicating a further mitigation of financial conditions. Moreover, the index reached its minimum value in the second quarter of 2017, which leads to the conclusion that the conditions on the Croatian market in the second quarter of 2017 were the mildest ever recorded since we have been monitoring the index movements. Both index components – domestic and foreign – followed the declining trend in the second quarter, while at the end of June, the foreign component recorded the mildest ever financial conditions since the first quarter of 2005. Improved global financial conditions are reflected in the increased stability of capital markets, which is also exhibited by the variables used in our index – the DAX and S&P 500 indices, that continued to grow in the second quarter. Stabilization of the political situation in Europe also contributed to the European stock market indices increasing and to a decrease in government bond yields. The substantial liquidity of the system, resulting from the expansive monetary policy of the European Central Bank, has kept short-term interest rates on the money market in the negative. Consequently, the focus has shifted from the political situation in the EU to the next move of the European Central Bank, which will define the direction of financial conditions in the next quarter.

The domestic components of the IFIS index continued with their positive contribution to the mild financial conditions, although further mitigation has been halted compared to the previous quarter. Notably, the banking system variables contributed to the easing financial conditions through a high liquidity of the financial system and by maintaining the interest rates on loans at relatively low levels, reached during the first quarter. The developments in the banking market in the second quarter were also marked by continued decrease in interest rates on deposits, both in local currency and with currency clauses. Government bond yields, which decreased compared to the second quarter of last year, also contributed to the easing financial conditions in Croatia. Such developments can be attributed to improved macroeconomic indicators in the observed period, especially those related to government finance.
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.