Big Mac Index: How The SA Rand Is Massively Undervalued


While government works towards revamping of the nation’s economic stance, latest Big Mac Index shows that the SA currency remains one of the most undervalued in the world

The Big Mac index , which is an initiative created by The Economist, said the SA rand is seriously undervalued, currently trading at R13.55 to the dollar, when it should be less than half that.

The initiative was created to measure whether or not currencies  are at their right levels . The initiative also based its theory on the purchasing-power parity (PPP) which has the notion that exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services (in this case, a Big Mac burger) in any two countries.

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According to the Big Mac Index, South Africa has one of the most undervalued currencies (62.7%) in the world. It also says unlike in the US where a Big Mac sells for $5.04 on average in 2016, in South Africa the price is $1.89.

This means that a South African in the US would expect to pay a lot more for the same product that would be less than half the price in their home country, the initiative said.

While the Rand is currently trading at R13.55 to the dollar, the ‘burgernomics’ assessment says it should actually be R5.20. A currency is considered undervalued when its value in foreign exchange is less than it “should” be based on economic conditions, it further explained.

A nation’s currency value isn’t however, determined objectively, though it could be devalued due to a lack of demand, even if a country’s economy is strong, other factors could add to its devaluation. this include like investors’ appetite for risk, as we as the plethora of conditions (both locally and globally) that play into the stability of a market.

In the case of South Africa, the rand is one of the most volatile currencies globally thanks to the sheer volume of economic conditions which push and pull it around.

These include:

  • Being grouped with two different currency markets (emerging markets and commodity markets)
  • The USA’s federal reserve rate normalisations (which has a global impact)
  • China’s economic slowdown (which impacts demand for commodities)
  • Rating agencies (which currently have the country on a negative outlook)
  • Low business confidence
  • Low growth projections
  • Low tax collections
  • Sentiment (which is currently carried by a sense of uncertainty)
  • Political instability (which can influence policy direction)

All of these factors, play a part in making the Rand a volatile currency providing little or no opportunity to safely invest while other markets shake and by not offering the stability of currencies that have stronger growth prospects.

Currently, the Rand is even losing the ‘top honour’ to the Turkish lira

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Meanwhile, analysts at HSBC say they believe South Africa’s Rand will endure a year of two halves while the Zar will weaken in H1-17; due to a combination of a challenging domestic backdrop and broader USD strength.

South African growth remains lacklustre at only 0.7%, and this combined with high inflation of 6.0% means budgets are squeezed as inflation devalues everyone’s earning power and because the South African Reserve Bank (SARB) will be reluctant to put up interest rates, which will have the effect of weakening the currency, the analysts reported.