This is the ‘real’ value of the rand right now – and why we’re way off
The Economist has done its mid-year update to its Big Mac Index for 2024, showing how the local unit has made gains against the dollar this year—although it remains one of the most undervalued currencies in the world.
The Big Mac Index is an initiative created by The Economist that aims to measure whether currencies are priced at their “correct” level. The Index is updated twice a year—in January and July.
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, is included in several economic textbooks, and has been 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, R18.19 at the time The Economist did the study (31 July), suggests the South African rand is 49.9% undervalued – the 5th most under-valued currency in the analysis.
This is a slightly stronger position than at the start of the year, where the rand was 52.5% undervalued, and the 4th most undervalued in the basket of currencies The Economist looked at.
The only currencies more undervalued by this measure are the Taiwanese dollar (59.9% undervalued), the Indonesian rupiah (56.8%), the Egyptian pound (56.6%) and the Indian rupee (51.7%).
GDP per capita
One of the Big Mac index’s biggest flaws is that it doesn’t consider the full picture 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 a country’s GDP per capita 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 9th most undervalued (from 6th most undervalued in January).
In PPP terms, a Big Mac costs 49.9% less in South Africa (US$2.85) than in the United States (US$5.69) at market exchange rates.
Based on differences in GDP per capita, a Big Mac should cost 19.4% less (ie, $4.58). Based on differences in GDP per capita, the index suggests the rand is 37.8% undervalued, and its ‘real’ and fair value should be around R11.31 to the dollar.
Why the rand is undervalued
While measures like PPP play a role in determining a currency’s value, there is more at play than direct or even adjusted conversions.
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, as an emerging market that is considered high risk, the value of the rand is driven by the whims of the global economy.
Local issues are also a big part of the picture—as was seen in the significant rand weakness (and subsequent rally) before, during and after the 2024 elections, as well as the massive impact of load shedding—but global conditions are the key driver.
Case in point: the rand was running below R14.50/USD in early April 2022 but weakened considerably due to the rise in global risk aversion.
At the time, the United States was expected to hike interest rates, which it did. Global growth slowed, and the US dollar strengthened – and markets have been tracking that position since.
According to economists, the PPP value of the rand is likely closer to that R14.50-R15.00 range, and the currency will only start moving back towards that level with the start of a sustained US interest rate cutting cycle.
Positive reforms from the Government of National Unity, a definitive end to load shedding and all-round positive conditions for exports and trade and the mitigation of a plethora of risk factors would also see the rand trade closer to its ‘fair’ value.
Read: Massive shift for South Africa’s best and worst-case scenarios
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