Rand isn't world's most undervalued currency any more. It should trade at R6/$, index shows
- The Economist's Big Mac index shows that - theoretically - the rand should be trading at R5.92/dollar.
- The currency is undervalued by 62% against the dollar, compared to currencies in Brazil (-30%) and India (-54%).
- But six months ago, it was undervalued by even more – and it was also the world’s most undervalued currency. Now currencies in Russia and Turkey fare worse.
- For more articles, go to 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 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 R33.50 in South Africa and $5.71 in the US. This means the “implied exchange rate” is R5.92/$.
“The difference between this and the actual exchange rate, R15.52, suggests the South African rand is 61.9% undervalued,” the Economist says.
Six months ago, when the Big Max index was last published, the rand was 67% undervalued – the worst performance in the world.
But the currencies of Lebanon (68.7%), Russia (-68%) and Turkey (64.5%) are currently more undervalued that the rand.
The vast majority of currencies are undervalued to the dollar – Brazil by 30%, Argentina (-34%), India (-54%) and Indonesia (-58%). Only Sweden, Norway 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 pandemic and load shedding on an already weak economy. International credit agencies have cut South Africa's sovereign rating deeper into “junk” over recent months.
But the local currency has staged a massive comeback since blowing out to almost R19.30 in April, during South Africa’s hard lockdown.
This is due in part to the higher interest rates that the rand offers. A recent Bloomberg survey shows that SA’s real interest rate (3%) is the highest on offer across the seventeen biggest emerging markets.
Also, South Africa is on track for its first annual current account surplus in many years - which supports the rand.
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