The South African rand has seen a strong recovery over the past 15 months, moving from some of its weakest levels post-NeneGate in 2016, to a position of relative strength in the first quarter of 2017.
The local unit has seen a significant recovery, climbing from R15.40 versus the dollar on 10 March 2016, to R13.20 a year later.
While the rand is matched against the US dollar, the British pound and the euro to gauge its fluctuating strength and weakness, there are many destinations where it outperforms local currencies.
This includes countries like Mexico and the Czech republic (where one rand gets 1.5 to 2.0 times the local currency), or countries like Indonesia and Colombia, where a single rand can get you multiple hundreds or thousands of the local currency units.
Of course, when measuring currency strength and weakness, a simple currency conversion is not enough, as it does not take purchasing power parity into account – and is more useful for tourists or expats that continue to earn in their home currency.
Purchasing price parity is 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 any two countries.
A rudimentary method of determining PPP is the Big Mac Index, a system developed the The Economist based on the fact that the McDonald’s Big Mac is similar in quality and price in all markets where it sold.
Using “burgernomics”, while not without its flaws, gives a basic idea of how currencies are truly weighted.
The index uses the US dollar as its base currency – and according to the latest version, South Africa’s rand (which currently trades around R13.20 to the dollar) should be trading at R5.20 to the dollar.
This is because a single rand as the same purchasing power locally as 63 US cents in the states.
The table below uses the Big Mac index to show a truer reflection of the rand versus the currencies which are weaker on a conversion basis.
|Country/Currency||Value of ZAR1.00 in local units||Big Mac (local units)||Big Mac (ZAR equivalent)||ZAR purchasing power (%)||PPP value of ZAR1.00 in local units|
|South African Rand||1.00||28.00||28.00||100%||1.00|
|Taiwan New Dollar||2.35||69.00||29.39||95%||2.24|
|Sri Lankan Rupee||11.43||350.00||30.62||92%||10.46|
|Chilean Peso||50.08||2 100.00||41.93||67%||33.44|
|South Korean Won||87.56||4 300.00||49.11||57%||49.92|
|Colombian Peso||226.23||7 900.00||34.92||80%||181.40|
|Indonesian Rupiah||1 011.35||30 500.00||30.16||93%||938.99|
Despite a favourable exchange rate, in most cases what you would pay for a Big Mac in South Africa would not be enough to buy a Big Mac in many other comparative countries.
Put another way, in terms of purchasing power, countries that appear to have weaker currencies may actually be stronger than they first appear, in local terms.
In South Korea, for example, the purchasing power of the Won is almost double that of the rand, in local terms – the price of the Big Mac in South Korea is almost double what you would pay in South Africa (R49 vs R28).
So while you get 88 Won for every rand, it’s only ‘worth’ around 50 Won in PPP terms, due to cost of living adjustments.
The Big Mac Index is a very rudimentary way to gauge PPP, and other methods – looking at local spending as a portion of earnings, or a more diverse basket of goods – can provide deeper insight into these conversions.
The World Bank also publishes its global PPP data, using the dollar as a basis. It should be noted that the Big Mac Index closely aligns with this data.