- The Economist’s Big Mac Index shows that – theoretically – the rand should trade at 5.92 rand / dollar.
- The currency is 62% undervalued against the dollar, against the currencies of Brazil (-30%) and India (-54%).
- But six months ago, it was even more undervalued – and it was also the most undervalued currency in the world. Now the currencies in Russia and Turkey are doing less well.
- For more articles, visit www.BusinessInsider.co.za.
The Economist’s Big Mac Index has been updated, and shows that the rand is 62% cheaper than it theoretically should be against the dollar.
Since 1986, the publication has used McDonald’s Big Mac prices to determine whether currencies are overvalued or too cheap.
The Big Mac Index is based on the theory of purchasing power parity. In the long run, in theory, exchange rates should adjust so that an identical product must cost the same in all countries.
READ | EXPLAINER: How Big Bank Traders May Have Rigged the Rand for Years
A Big Mac costs around R33.50 in South Africa and $ 5.71 in the United States. This means that the “implied exchange rate” is R / $ 5.92.
“The difference between this rate and the real exchange rate, 15.52 rand, suggests that the South African rand is undervalued at 61.9%,” says The Economist.
Six months ago, when the Big Max Index was last released, the rand was 67% undervalued – the world’s worst performance.
But the currencies of Lebanon (68.7%), Russia (-68%) and Turkey (64.5%) are currently more undervalued than the rand.
The vast majority of currencies are undervalued against the dollar – Brazil by 30%, Argentina (-34%), India (-54%) and Indonesia (-58%). Only Sweden, Norway and Switzerland are considered overvalued against the dollar.
Just ten years ago, the rand was “only” 39% undervalued against the dollar.
The undervaluation of the rand against the dollar since 2000. Source: The Economist Big Mac index
There are many pressures on the rand, including concerns about growing government debt and the impact of the pandemic and the load-shedding on an already weak economy. International credit agencies have further downgraded South Africa’s sovereign rating to “junk” in recent months.
But the local currency has made a massive comeback since exploding to nearly R19.30 in April, during South Africa’s brutal lockdown.
READ | The Rand’s Massive Return: It’s Like The Lockdown And The “ Junk ” Never Happened
This is in part due to the higher interest rates offered by the rand. A recent Bloomberg poll shows that the SA real interest rate (3%) is the highest offered in the seventeen largest emerging markets.
In addition, South Africa is on track for its first annual current account surplus in many years – supporting the rand.