Is the Rand correctly priced?

I get a lot of questions regarding our currency and why it is so weak. Although there are numerous factors influencing a currency, below is a short interesting explanation. The Economist, famous for their economical articles, developed an interesting measure of currency value in 1986 and it is called the Big Mac Index. 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 burger) in any two countries. Below is the GDP adjusted graph on how the South African Rand is priced against the dollar.

The South African rand is 27% undervalued against the US dollar

From the above graph it is clear that the Rand is undervalued by 27%, thus the true value against the dollar should be roughly R10.

Some factors “hurting” our currency include:

  1. Poor political leadership and uncertainty on key issues like corruption, crime and economical growth.
  2. BRICS countries’ economical state and decisions. Unfortunately the Rand is very dependent on emerging market developments and especially that of China.
  3. Our financial institutions are some of the best regulated in the world and that makes the Rand the most traded currency among developing nations, which can lead to more volatility in currency.

You can read the full article here.