IFIS for the third quarter of 2020: Financial conditions continue to ease

In the third quarter of 2020, financial conditions continued with mitigation which started in the second quarter. Mitigation of financial conditions followed a sudden tightening in February and March 2020, due to the outbreak and spreading of COVID-19 pandemic. Continued easing of financial conditions in the third quarter was under the influence of domestic and foreign index components.

Mitigation trend of foreign conditions in the third and the second quarters was triggered by measures which leading central banks took in order to keep favorable financial conditions, liquidity and stability of international financial markets. Favorable movements at world markets had a positive impact on the improvement of foreign financial conditions in the third quarter of 2020. Domestic financial conditions continued with the mitigation trend in the third quarter due to the stable exchange rate and financial system, as well as favorable financing conditions. Croatian National Bank contributed to such an environment by continuing to increase the degree of monetary policy expansivity, so that traditionally high level of liquidity of the domestic financial system reached record levels in the third quarter. State credit risk is, at the end of the third quarter, still relatively low due to favorable financing conditions, but also due to the financial means available from years-long European budget and the “Next Generation EU” instrument. The third quarter also recorded a continuation of the decrease 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 because of the pandemic.

Domestic and foreign financial conditions will be, until the end of this year, under a strong influence of accelerated spreading during the second wave of the coronavirus outbreak and the expectations linked to the availability of an effective vaccine. Additional vulnerabilities could be expected due to deepened fiscal imbalances in the EU countries, which are the result of introducing different measures to help the economy, but also of possibly slower recovery of the economy due to a strong second wave of the virus outbreak.

 

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.