Inflation and Interest Rates in Africa: A Big Deal For Investors?

How Consumers View Inflation
How Consumers View Inflation
Recently, several African economies released inflation figures for Jan-2020. The region’s largest economies, Nigeria and South Africa, recorded inflation rates of 12.1% y/y (22-months high) and 4.5% y/y (7-months high) respectively. This was due to a respective pressure in food and energy prices. Similarly, inflation rates in Rwanda (7.3%) and Mauritius (2.0%), grew compared to Dec-2019. However, Ghana (7.8%), Tunisia (5.9%) and Namibia (2.1%) recorded lower y/y rates.
As compensation to investors, nominal yields on fixed-income securities in African countries are expected to remain above inflation. Using the 10-year bond as a proxy for nominal yield, across the countries covered, Ghana, Tanzania, and Egypt offer the highest real return at 11.2%, 10.7%, and 8.8% respectively. However, Mauritius (2.2%) and Morocco (1.5%) offer the lowest cover for inflation. For the continent’s heavyweights, South Africa offers 4.5% real yield, while Nigeria’s real yield at -1.4% is very worrisome, implying a negative real return for investors.
Looking at the performance of these economies in attracting capital, the positive real yields in Ghana and Egypt, coupled with strengthening local currencies (7.0% and 2.3% YTD respectively), have buoyed foreign portfolio inflows. As a result, foreign reserves for these countries has been on the rise. However, the policy uncertainties in Nigeria seemed to be slowing the pace of foreign capital flows, amid sustained pressure on external foreign reserves.