- High cost of living is expected to continue in East Africa in 2023 as the region is projected to experience sustained high inflation pressures according to the latest data from Sanlam Investment East Africa, 2023 investment outlook report.
- The region’s median inflation rate is currently estimated at almost 9 percent with some economies registering double digit inflation.
- High inflation is a key investment risk with central banks leaning towards higher interest to curb inflation.
High cost of living is expected to continue in East Africa in 2023 as the region is projected to experience sustained high inflation pressures according to the latest data from Sanlam Investment East Africa, 2023 investment outlook report.
The report attributes the sustained high inflation pressures to key risks arising from higher energy prices due to the protracted Russia – Ukraine war.
The region’s median inflation rate is currently estimated at almost 9 percent with some economies registering double digit inflation.
“Inflation rose significantly in the East Africa region mirroring the situation globally. Inflationary pressures are expected to continue as global shocks persist. The surge in global inflation is on account of global supply chain disruption from the COVID-19 pandemic, high fuel prices and food supply shortage due to the Russian-Ukraine conflict, strengthening of the U.S. Dollar and Covid-19 restrictions in China following outbreaks of the COVID-19 virus,” the report states.
According to the report, high inflation is a key investment risk with central banks leaning towards higher interest to curb inflation.
“Most Central Banks in developed economies increased their key policy interest rates to curb the historical high inflation rates. At above 8 percent, inflation in the US and Europe is above the upper target range of 2 percent . EA currencies will remain under pressure in 2023 as developed economies counter inflation by tightening monetary policy. Currency pressure remains a key risk to interest rates outlook in the region,” the report explains.
The report predicts that the Central Bank of Kenya (CBK) could increase rates in 2023 to manage the inflationary pressures and global risks.
“Increased pressure on the currency could further exacerbate the pressure on interest rates. Kenya faces significant currency pressures on account of external debt repayment obligations expected in 2024. In Uganda, the risk of higher interest rates may be tempered by high liquidity in the money markets. The Bank of Tanzania is expected to maintain an accommodative monetary stance to increase private sector credit growth,” the report reads.
“Kenya is vulnerable due to higher debt to GDP ratio and exposure to foreign currency debt. The country has a Eurobond repayment of USD 2 billion in June 2024. We expect the CBK to prioritize foreign debt service repayments. The government will increasingly rely on multilateral agency funding, commercial syndicated loans, and the CBK forex reserves to fund foreign debt maturities,” the report continues.
The report also commented on the outlook for the Kenyan stock market stating that after a 23.4 percent market decline in 2022, stock market valuations are now cheaper and could represent an attractive entry point for long term investors. However, US Dollar strength and elevated yields in local government bonds could still dampen investors (both foreign and local) participation at the securities exchange.
“The current volatile investment environment favours consideration of diversification into quality alternative assets. The PE asset class offers East African investment opportunities which are often embedded with currency risk diversification, whilst lower company valuations may offer attractive entry points for PE funds. However, there remains the risk that the current high local interest rate environment could impact fundraising activities. Within RE, SIEAL expects emerging alternative opportunities to offer greater value compared to more traditional property investments. Emerging opportunities include data centres, healthcare, student housing, cold storage, affordable housing, and infrastructure that could offer higher returns to investors than more traditional office, retail and residential real estate investments,” the report reads.
Global Economy Performance
According to the report, In 2023, the global economy is expected to slow down as major global economies enter a recession. This was caused by the Russia-Ukraine war and spillovers from the Covid-19 Pandemic, which led to higher global inflation.
The multi-decade high inflation levels have led to a sharp increase in interest rates by the major central banks. This has slowed down capital and consumer spending.
The International Monetary Fund (IMF) projects the global economy will slow to 2.7 percent in 2023 from the projected 3.2 percent in 2022.
Historically low interest rates in advanced economies have been positive for developing economies. The recent rise in global interest rates and US Dollar strength has resulted in capital outflows from Emerging and frontier markets as US Dollar assets have become more attractive.
This has also limited the capacity of developing countries to access international debt markets. This has caused significant challenges and vulnerabilities to these economies.