Inflation describes the general increase in prices over time. In Africa, inflation tends to be higher and more volatile compared to other developed continents such as Europe and America. It is caused by factors such as supply chain disruptions, for instance, the Russian-Ukraine war caused the price of fuel to increase drastically which even led to fuel shortages in countries such as Kenya, Currency depreciation, for instance, if the Kenyan shilling depreciated against the dollar, cost of commodities such as fuel and electronics would rise since we normally import a significant size of consumption goods and price volatility in foodstuff. Since agriculture is an integral part of most economies in Africa, it’s vulnerable to climate changes such as drought and floods. This will lead to low harvests and later food shortages, which will raise the prices of staple food like maize, rice and vegetables.
Inflation affects investments by eroding returns. For instance, in Ghana between 2022 and 2023, an investor in Ghana who invested GHC 30,000.0 earned a 14.3% return on a fixed deposit in 2023 on FNB’s Flexi Fixed Deposit scheme. However, in 2022, the country’s inflation rate peaked at 54.1% during that same time. An investor lost purchasing power, because the return was significantly below inflation. It also undermines returns on fixed income assets like treasury bills and bonds. Since they are fixed in nature they do not adjust to inflation which depreciates the real income in those assets. Factories are also affected by inflation since it increases their input costs such as raw materials. For instance, in 2022, Kenyan manufacturers faced rising costs in commodities such as flour. Companies such as Unga Group saw a decline in their profit margins due to rise in fuel prices. Investors in these firms experienced falling stock prices during this time.
Currency risks describe the probability that fluctuations in exchange rates will adversely affect the value of investments. African countries are mainly sensitive to currency fluctuations attributable to their heavy reliance on imported goods and also foreign loans that are in a foreign denomination. Currency fluctuations are caused by trade imbalances, that is, when imports exceed exports, which causes an increased demand in foreign currency which in turn weakens local currency. Political uncertainties such as policy changes or electoral conflicts may lead to investors and foreign investors to shift their capital investment to foreign and neighbouring countries. External shocks, like rising interest rates in the US, can trigger capital shift from emerging markets.
Strategies to manage inflation and currency risks include diversifying in different asset classes such as money market funds, real estate and bonds. Investing in avenues that are less bound to risk is a viable strategy. Assets such as real estate tend to appreciate and generate rent that can adjust with inflation. Staying informed by subscribing to sites such as Bloomberg enables one to be on the current news and avoid adverse effects of inflation and currency risks.
While inflation and currency risks are still a real threat in Africa, potential investors should not abstain from investing in Africa. With the right research and knowledge, potential investors can easily avoid the adverse effects of inflation and currency risks.
