The Big Mac Index measures the real value of currencies by citing two methods \u2013 a direct measure of PPP using raw prices and an adjusted index that considers local GDP data.<\/p>\n\n\n\n
Using the \u2018raw\u2019 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).<\/p>\n\n\n\n
Using this direct comparison in pricing, the\u00a0implied exchange rate of the rand is R9.12.<\/strong><\/p>\n\n\n\n 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 \u2013 the 5th most under-valued currency in the analysis.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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%).<\/p>\n\n\n GDP per capita<\/strong><\/p>\n\n\n\n One of the Big Mac index’s biggest flaws is that it doesn\u2019t consider the full picture when evaluating currency differences.<\/p>\n\n\n\n Experts have argued that because of PPP, the cost to produce a Big Mac is typically cheaper in poorer countries, thus skewing the data.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n In the group\u2019s GDP-adjusted index, South Africa\u2019s currency is still severely undervalued but has shifted up to 9th most undervalued (from 6th most undervalued in January).<\/p>\n\n\n\n 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. <\/p>\n\n\n\n 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 \u2018real\u2019 and\u00a0fair value should be <\/strong>around R11.31<\/strong>\u00a0to the dollar.<\/p>\n\n\n Why the rand is undervalued<\/strong><\/p>\n\n\n\n While measures like PPP play a role in determining a currency’s value, there is more at play than direct or even adjusted conversions.<\/p>\n\n\n\n A currency is considered undervalued when its value in foreign exchange is less than it \u201cshould\u201d be based on economic conditions. 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.<\/p>\n\n\n\n Other factors are also taken into account, including investors\u2019 appetite for risk and a plethora of local and global conditions that play into a particular market\u2019s stability.<\/p>\n\n\n\n In South Africa\u2019s case, as an emerging market that is considered high risk, the value of the rand is driven by the whims of the global economy.<\/p>\n\n\n\n Local issues are also a big part of the picture\u2014as 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\u2014but global conditions are the key driver.<\/p>\n\n\n\n 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. <\/p>\n\n\n\n At the time, the United States was expected to hike interest rates, which it did. Global growth slowed, and the US dollar strengthened \u2013 and markets have been tracking that position since.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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 <\/strong><\/a>would also see the rand trade closer to its ‘fair’ value.<\/p>\n\n\n\n![\"\"](\"https:\/\/businesstech.co.za\/news\/wp-content\/uploads\/2024\/08\/Big-Mac-Index-July-2024.jpg\")
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