The Economist has updated its Big Mac Index for mid-2023, showing that the rand is more undervalued against the dollar than at the start of the year.
The local unit has had a rough week, losing around 5% of its value against the dollar by Friday (4 August). This follows a week where the rand was singing – along with other emerging markets – due to a risk-on environment globally.
According to economists from the Bureau for Economic Research (BER), the wild swing came because of a shock downgrade to the United States’ credit rating by Fitch amid weaker economic data from China, which quickly put investors into a very risk-averse mindset.
With the rand now trading at R18.50 to the dollar, the currency is again in dangerous territory. However, this is not the ‘true’ value of the rand, according to The Big Mac Index.
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.
