The ‘real’ value of the rand in 2024 – according to the Big Mac Index

The Economist has updated its Big Mac Index for 2024, showing that the rand is still severely undervalued against the US dollar – and has lost even more value at the start of the year compared to 2023.

The Big Mac Index is an initiative created by The Economist that aims to measure whether currencies are priced 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 Big Mac burger) in any two countries.

The Big Mac is selected for comparison as the popular fast-food meal is widely available and remains fairly consistent in pricing; however, it is by no means an exact measure.

According to The Economist, ‘Burgernomics’ was never intended to be a precise gauge of currency misalignment but merely a tool to make exchange-rate theory more digestible.

However, the group noted that the index has become a global standard, included in several economic textbooks, and is also the subject of at least 20 academic studies.

The ‘real’ value of the rand in 2024

The Big Mac Index measures the real value of currencies by citing two methods – a direct measure of PPP using raw prices and an adjusted index that considers local GDP data.

Using the ‘raw’ direct conversion data, a Big Mac costs R51.90 rand in South Africa (up from R49.90 in 2023) and US$5.69 in the United States (up from US$5.36).

Using this direct comparison in pricing, the implied exchange rate of the rand is R9.12.

The difference between this and the actual exchange rate, R19.19 at the time The Economist did the study, suggests the South African rand is 52.5% undervalued – the 4th most under-valued currency in the analysis.

Notably, this is a weaker position compared to the last index update in mid-2023, when the rand was the fifth most undervalued currency at the time.

This suggests the rand is moving further away from its “real” value in global markets.

The only currencies more undervalued by this measure are the Taiwanese dollar (58% undervalued), Indonesian rupiah (57.3%) and Indian rupee (54.5%).

GDP per capita

One of the bigger flaws of the Big Mac index is that it doesn’t take the full picture into account when evaluating currency differences.

Experts have argued that because of PPP, the cost to produce a Big Mac is typically cheaper in poorer countries, thus skewing the data.

To account for this, The Economist produces a parallel index that factors in the GDP per capita of a country to draw a more accurate conclusion.

In the group’s GDP-adjusted index, South Africa’s currency is still severely undervalued but has shifted up to sixth position.

In PPP terms, a Big Mac costs 41% less in South Africa (US$2.71) than in the United States (US$5.69) at market exchange rates. Based on differences in GDP per capita, a Big Mac should cost 19.5% less (ie, $4.58).Based on differences in GDP per capita, the index suggests the rand is 41% undervalued, and its ‘real’ and fair value should bearound R11.32 to the dollar.

Under-valued?

A currency is considered undervalued when its value in foreign exchange is less than it “should” be based on economic conditions. However, currency value isn’t determined objectively and may be undervalued due to a lack of demand, even if a country’s economy is strong.

Other factors are also taken into account, including investors’ appetite for risk and a plethora of local and global conditions that play into a particular market’s stability.

In South Africa’s case, the rand has carried a hefty risk premium priced into markets for some time, with ongoing energy, logistics and infrastructure crises crippling industries and hamstringing growth.

The country also has much to account for with its economic and foreign policies, which coloured much of the rand’s story in 2023.

All of the local issues are baked into this risk premium and have kept the currency significantly weaker relative to its “fair value”. However, the unit is also subject to wider global issues and market sentiment that often throws the rand in with other blocs – such as risk-off sentiment impacting all emerging markets.

According to local economists, the rand is undervalued by as much as R3.00 given these realities, which would put the ‘fair’ exchange rate between R15 and R16 to the dollar. 

Read: The worst-case 2024 election result that could push the rand over R21 to the dollar