{"id":151711,"date":"2017-01-20T12:30:18","date_gmt":"2017-01-20T10:30:18","guid":{"rendered":"https:\/\/businesstech.co.za\/news\/?p=151711"},"modified":"2017-07-26T12:36:41","modified_gmt":"2017-07-26T10:36:41","slug":"the-rand-is-massively-undervalued-according-to-the-big-mac-index","status":"publish","type":"post","link":"https:\/\/businesstech.co.za\/news\/finance\/151711\/the-rand-is-massively-undervalued-according-to-the-big-mac-index\/","title":{"rendered":"The rand is massively undervalued according to the Big Mac Index"},"content":{"rendered":"

The latest Big Mac Index shows that South Africa’s currency remains one of the most undervalued in the world\u00a0– currently trading at R13.55 to the dollar, when it should be less than half that.<\/p>\n

The Big Mac index is an\u00a0initiative created by The Economist that aims to measure whether currencies are at their \u201ccorrect\u201d level.<\/p>\n

It is based on the theory of purchasing-power parity (PPP) \u2013 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.<\/p>\n

The Big Mac is selected for comparison as the \"\"<\/a>popular fast-food meal is widely available across the world, and remains fairly consistent in pricing; however, it is by no means an exact science.<\/p>\n

\u201cBurgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible,\u201d The Economist said.<\/p>\n

The index has however, become a global standard, included in several economic textbooks while also becoming the subject of at least 20 academic studies, the group noted.<\/p>\n

According to the index, South Africa has one of the most undervalued currencies\u00a0(62.7%) in the world.<\/p>\n

In the US, a Big Mac sells for $5.04\u00a0on average in 2016 \u2013 in South Africa the price is $1.89.<\/p>\n

This means that a South African in the US would expect to pay\u00a0a lot more for the same product that would be less than half the price in their home country.<\/p>\n

While the rand is currently trading at R13.55<\/strong> to the dollar, the ‘burgernomics’ assessment says it should actually be R5.20.<\/strong><\/p>\n

\"\"<\/a><\/p>\n

A currency is considered undervalued when its value in foreign exchange is less than it \u201cshould\u201d be based on economic conditions.<\/p>\n

However, currency value isn\u2019t determined objectively, and may be undervalued due to a lack of demand, even if a country\u2019s economy is strong. Other factors are also taken into account, like investors’ appetite for risk, as we as the plethora of conditions (both locally and globally) that play into stability of a market.<\/p>\n

Why we’re so undervalued<\/strong><\/p>\n

In South Africa’s case, the rand is one of the most volatile currencies globally (recently losing the ‘top honour’ to the Turkish lira<\/a><\/strong>), due to the sheer volume of economic conditions which push and pull it around.<\/p>\n

These include:<\/p>\n