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

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%.

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.