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Rand 67% undervalued vs dollar, claims The Economist Big Mac Index

Suggests currency should be trading at around R5.43.
Image: Daniel Acker/Bloomberg

South Africa’s rand is the most undervalued currency in the world against the US dollar.

This is according to The Economist’s Big Mac Index, published this week. The mid-year update of the index claims the rand is 67.4% undervalued versus the greenback.

“A Big Mac costs R31.00 in South Africa and $5.71 in the United States. The implied exchange rate is 5.43. The difference between this and the actual exchange rate, R16.67, suggests the South African rand is 67.4% undervalued,” says The Economist.

This represents the rand’s most devalued position on the index over the last 20 years.

Its previous record weakest points were logged in April 2002 and January 2016, when the rand was undervalued by 64%.

Source: The Economist

While the rand has strengthened somewhat against the dollar in recent weeks, it has come under pressure this year in the wake of the Covid-19 global pandemic and South Africa losing its investment grade credit rating.

Back in July 2010, when South Africa was on a high having just hosted the Fifa World Cup, the index showed the rand being undervalued by 34% against the dollar.

The Big Mac Index was established by The Economist in 1986 “as a light-hearted guide” to whether currencies are at their “correct” level.

“It is based on the theory of purchasing-power parity [PPP], the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services [in this case, a burger] in any two countries,” notes the London-based publication.

“Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of dozens of academic studies,” it adds.

Meanwhile, the latest Big Mac Index’s “theory” on the rand is in stark contrast to the recently launched RMB Milk Index, which suggests that the rand is trading at fair value.

“The rand stands out among African currencies as trading close to its fair value, meaning that it is neither significantly overvalued or undervalued,” RMB noted in a statement issued on June 29.

“The index compares the price of milk in African countries to gauge whether currencies are priced at their ‘correct’ or fair level. It is similar to The Economist’s Big Mac Index; but, uses milk instead because it is available all over the continent,” RMB added.

“According to our Milk Index, the rand is actually overvalued by 1.92%, which is minor given the volatility of recent months,” Neville Mandimika, economist and strategist at RMB said at the time.

RMB reiterated that its Milk Index shows that the rand, along with the Egyptian pound, “stand out as trading closest to fair value”.

Mandimika pointed out: “Both currencies typically move in line with economic fundamentals [the rand more so than the Egyptian pound], so both currencies better reflect demand and supply conditions. However, the Egyptian pound didn’t have to weaken by as much as the rand since the pandemic began because Egypt went into this crisis on a significantly better growth and fiscal footing than South Africa.”

According to RMB, unlike the rand and the Egyptian pound, most other African currencies are overvalued, with knock-on effects on the price of milk. “For example, the price of a litre of milk in South Africa is $0.98 [nearly the same as in the United States], whereas in Ghana it is $2.04 and in Nigeria $2.48,” it noted.

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In my opinion this proposed PPP (Big Mac) approach is wrought with errors. It does not seem to take into account, on the face of it, the cost of producing the Big Mac in different countries.

If a Big Mac costs $2.5 to produce and sells for $5 in USA, and in SA it costs R 15 to produce and sells at R 31 there can hardly be any true discrepancy…

Also, it seems to greatly over simplify how a currency’s worth is actually determined. A currency’s value as compared to other currencies, is a function of its demand, utility, and trust. A change in any of these factors will change the relative value of the currency.

In SA there is a lot impacting in all these factors: expropriation without compensation, rampant crime, failing infrastructure, an incapable government, pathetic judiciary serving largely as a confirmation vehicle to failing government policy, blatant racist laws and conduct of politicians, commitment to socialist ideologies, shrinking economy vs an ever increasing debt burden.

In my view there is a strong case for the rand to tank much more rather than appreciate.

It is a “tongue in cheek” index, no need to take it seriously. It just gives you a different perspective. The take away should be that burgers in SA are too cheap, and based on the waist size of the average Saffa, I would agree.

The Rand is definitely undervalued, but currencies are driven by perception/”feelings”.

The factors you mention may be loosely referred to as the ANC premium.

Haha, that’s the KFC index methinks!!

Economist magazine also does a GDP per capita adjusted version, which gives the Runt about 40% undervalued. The GDP adjusted data series works quite well on for example Yuan. 50% undervalued in raw terms, less than 10% undervalued in the GDP adjusted data series.

I would not be betting against the Runt from current levels but I would certainly diversify at least ⅔ outside SA

Where do you find the GDP adjusted version of the “Big-Mac Index”?

Same link as the one in article, top right you can select

That is where it end the burger talk….in real life things are different.

Just compare the currency to the price of 1 ounce of Gold. This will show you the story of fiat money generally and the ZAR especially.

Fair point, I cannot see why a country undergoing de-industrialisation with a jobless rate north of 40% and endemic corruption stripping bare the public purse would see its currency depreciate.

We can draw one very serious pertinent conclusion from the index. The Big Mac index illustrates to what extent socialist redistributive policies makes life in South Africa cheaper for foreigners and more expensive for locals. Those who earn dollars, to spend in rands locally, are enriched by the socialist policies, while those who earn rands, to spend rands, are impoverished. In effect, the socialist government policies steal from the poor to enrich the wealthy.

The fact that the gap is widest for South Africans only proves that we are the most socialist country on earth at the moment, it says nothing else.

Wealthy citizens own assets offshore and derive an income in dollars or euros. The myopic solutions and populism offered by socialist politicians enable the citizens who earn hard currency to experience a lowering in the cost of living in South Africa, their standard of living rises, while the cost of living increases for everyone else, leading to a lower standard of living. Socialist policies act like a Robin Hood gone rogue. Socialism steals from the poor to enrich the wealthy. The longer this process continues, the more the poor “subsidise” the wealthy. Socialist policies create a cheap holiday destination for US citizens and an expensive hellhole for locals. This scenario is true for all socialist countries and even more applicable to countries who experience hyperinflation of their currency. Hyperinflation is always and without failure, the result of socialist policies.

Privatisation, property rights, law and order, individualism, free-market policies and capitalism will turn this trend around and enable locals to buy a Big Mac at purchasing parity with a US citizen.

This is the only meaningful conclusion we can draw from the Big Mac index.

Man does not live from Big Macs alone

We do since beer in unavailable.

A BIG MAC or 3 – is good after an all nighter on WIT BLITZ/ Moon Shine. That is true the world over and that is where the relevance stops. A lagging indicator maybe.

The NCCC just SUPER SIZED their STUPIDITY and ordered an extra large FLIES. A leading indicator for sure time and again.

Conclusion The Big Mac is headed to R150.00.

On the other hand, the Nandos Quarter Chicken index says that the Rand is 37% undervalued against the Pound and should trading around 13.25 meaning around 10.60 to the dollar.

Hardly parity between those indices.

This type of argument appeals to the “fast food” mentality mindset people. Talking point when gathered around a KFC bucket I suppose.

I suggest that this particular burger is overcooked….

Pity Zimbabwe doesn’t have a Mc Donald’s…. Cause going by the Mc formula just imagine how under valued there currency would be…… Somethings are cheap for a reason.

End of comments.

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