Big Mac. (McDonald's)
· The Economist's Big Mac index shows that - theoretically - the rand should be trading at R5.43/dollar.
· The currency is now undervalued by 67.4%, compared to Brazil (-32%), Argentina (-39%) and India (-56%).
· Of late, the rand has been a bit stronger after SA recorded its first current account surplus in 17 years.
The Economist’s Big Mac Index has been updated, and shows that the rand is now a whopping 67% cheaper than it theoretically should be against the dollar – the worst undervaluation of all the currencies measured.
Since 1986, the publication has been using 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, theoretically, exchange rates ought to adjust so that an identical product must cost the same across countries.
A Big Mac costs around R31 in South Africa and $5.71 in the United States. This means the “implied exchange rate” is R5.43/$.
“The difference between this and the actual exchange rate, R16.67, suggests the South African rand is 67.4% undervalued,” the Economist says.
The is the worst level in the World.
While the vast majority of currencies are also undervalued to the dollar – Brazil by 32%, Argentina (-39%), India (-56%) and Turkey (-64%) – none beat the rand. The rand was even weaker than the Russian rouble (-66.5%)
Only Sweden, Lebanon and Switzerland are considered overvalued against the dollar.
As recently as a decade ago, the rand was “only” undervalued by 39% against the dollar.
There are many pressures on the rand, including concerns about government's ballooning debt, and the impact of the coronavirus pandemic and load shedding on an already weak economy.
Over the past three weeks, the rand has received a boost from strong gold prices – South Africa is among the world’s biggest gold miners. It was also bolstered by a surprise current account surplus, the first in 17 years.
In the first quarter of 2020, South Africa exported almost R70 billion more in goods and services than it imported. This is good news for rand demand, as it means that fewer local importers had to sell rand and buy overseas currencies to pay for their imported goods.
Article courtesy of Business Insider South Africa