East Africa warned of sustained high inflation in 2023: Report

The latest data from Sanlam Investment East Africa's 2023 investment outlook report predicts that the East Africa region will experience sustained high inflation pressures in 2023.
The report attributes the sustained high inflation pressures to key risks arising from higher energy prices due to the Russia – Ukraine war.
The report predicts that the Central Bank of Kenya (CBK) could increase rates in 2023 to manage the inflationary pressures and global risks.

East Africa is projected to experience sustained high inflation pressures in 2023, according to the latest data from Sanlam Investment East Africa's 2023 investment outlook report. The report cites key risks arising from higher energy prices due to the ongoing Russia-Ukraine war as the main cause of the inflationary pressures. With a median inflation rate of almost 9%, some economies in the region are even experiencing double-digit inflation.

The report states that the current inflationary pressures are in line with global trends, as supply chain disruptions caused by the COVID-19 pandemic, high fuel prices, food shortages due to the Russia-Ukraine conflict, a strengthening US dollar, and restrictions in China following COVID-19 outbreaks have all contributed to the surge in global inflation. High inflation is also a major investment risk, as central banks in developed economies are leaning towards higher interest rates to curb inflation.

The report predicts that the Central Bank of Kenya (CBK) may increase interest rates in 2023 to manage inflationary pressures and global risks. However, Uganda may see a tempering of the risk of higher interest rates due to high liquidity in the money markets. Meanwhile, the Bank of Tanzania is expected to maintain an accommodative monetary stance to increase private-sector credit growth.

The report also notes that Kenya is particularly vulnerable to inflationary pressures due to its higher debt-to-GDP ratio and exposure to foreign currency debt. The country has a Eurobond repayment of USD 2 billion due in June 2024, and the report predicts that the CBK will prioritise foreign debt service repayments, with the government increasingly relying on multilateral agency funding, commercial syndicated loans, and CBK forex reserves to fund foreign debt maturities.

The outlook for the Kenyan stock market is also bleak following a 23.4% 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' participation in the securities exchange, The Exchange Africa reported.

The report suggests that investors consider diversifying into alternative assets such as private equity and emerging real estate opportunities, such as data centres, healthcare, student housing, cold storage, affordable housing, and infrastructure, as these may offer higher returns than more traditional investments.