This is what the rand should be worth: economist

Negative sentiment and virtual disruptions have been plaguing South Africa’s economy for the last decade.

This is according to Efficient Group economist, Francois Stofberg, who said that short-term volatility has translated into negative long-term fundamental changes in the country.

“Nowhere is this more evident than what’s been happening to South Africa’s currency lately,” he said.

“Fundamentally our rand should be closer to R12.50 levels. But reoccurring short-term disruptions, mostly caused by sentimental drivers such as poor governance, a lack of political leadership and efficiency, as well as weak policies, have eroded the long-term (fundamental) strength of our economy and currency,” he said.

Stofberg added that recent statistics released by StatsSA paint a worrying future, with unemployment in South Africa reaching 29.1% in the second quarter (Q2) of 2019.

“Fuelled by an economic slowdown, 6.7 million workers are without jobs and 2.7 million are too discouraged to seek employment,” he said.

“If these workers are added to the unemployment figure, it suddenly jumps to 40.9%; referred to as the broad definition of unemployment.”

“Mining output increased by 3.5% in Q2, compared to Q1, and manufacturing only slightly increased by 0.6%.

“We were hoping to see more out of these sectors, after the first-quarter slump in GDP, but at the current rate our economy will most likely only grow at 0.6% in 2019,” he said.

Big Mac Index 

The latest Big Mac Index published by The Economist also shows points to the rand being undervalued.

The index is an initiative created by The Economist that aims to measure whether currencies are priced at their “correct” level.

It measures the real value of currencies using two methods – the latest of which was introduced in 2018. The first measure is the ‘raw’ index, which looks at the direct prices of a Big Mac in different countries.

In this measure, a Big Mac costs R31.00 in South Africa and US$5.74 in the United States, meaning the implied exchange rate is R5.40.

The Economist has also included an ‘adjusted price’ index – which factors in another important indicator – GDP per capita – to draw a more ‘real world’ conclusion.

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

This suggests the rand is 35.2% undervalued, The Economist said, which means its ‘real’ value should be closer to R9.18 to the dollar.