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This is the ‘real’ value of the rand against the dollar

The recent political attacks on the South African Reserve Bank (SARB) and the push to nationalise does not make sense, says Dawie Roodt, chief economist at the Efficient Group.

Speaking at a Business/Partners event on Tuesday (19 March), Roodt said that shareholders of the Reserve Bank currently have no say over the bank’s monetary policy.

He added that this is unlikely to change should the government become a majority shareholder, but could ultimately tarnish the country’s international reputation.

“What you are going to achieve with government as the owner is that politicians are closer to the SARB,” he said.
“This is not the message you want to send to international investors. You want to send a message that the central bank is open and independent and that politicians are not going to interfere.”

Currency

Roodt said that nationalising the SARB could also have a direct impact on the rand – which is hugely undervalued at its current value.

He said that the currency should be trading closer to R8.30 against the dollar.

“The rand is hugely undervalued and it has been hugely undervalued for just about forever,” he said.
“At the moment the rand is even weaker than its average evaluation over the past 15 years which suggests that it may appreciate a little bit.

“However, I am not holding my breath and our view is that the rand will continue to depreciate against the major currencies at roughly 5% against the US dollar annually.

“Some years it may be a little bit more some a little bit less,” Roodt said.

Big Mac Index

The latest Big Mac Index – released by the Economist in January 2019 – also showed that the rand is still greatly undervalued.

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 across the world, and remains fairly consistent in pricing; however, it is by no means an exact science.

Using the raw data, a Big Mac costs R31.00 in South Africa and US$5.58 in the United States. The implied exchange rate is R5.56 to the dollar.

However, because many argue that, due to PPP, the cost to produce a Big Mac is cheaper in poorer countries than in richer ones, The Economist has also included an ‘adjusted price’ index in its July update – which factors in another important indicator, GDP per capita, to draw a better conclusion.

In this index, South Africa’s currency still remains heavily undervalued, but less so than when dealing with the straight conversion data.

In PPP terms, a Big Mac costs 60% less in South Africa (US$2.24) than in the United States (US$5.58) at market exchange rates. Based on differences in GDP per person, a Big Mac should cost 45% less. This suggests the rand is 41.8% undervalued, and should be at R10.14 to the dollar.

On Friday (22 March), the rand traded at the following levels against the major currencies:
Dollar/Rand: R14.39 (-1.17%)
Pound/Rand: R18.94 (-1.52%)
Euro/Rand: R16.27 (-0.53%)

 

Article credit https://businesstech.co.za/news/finance/306068/this-is-the-real-value-of-the-rand-against-the-dollar-2/

By | 2019-03-25T06:45:37+00:00 March 25th, 2019|LATEST NEWS|Comments Off on This is the ‘real’ value of the rand against the dollar

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