Rand is undervalued, Starbucks index finds

YOU MAY have heard of the Big Mac Index, published by The Economist, which measures purchasing power parity across countries and their currencies according to the price of a Big Mac burger. Australian financial and retail website Finder has come up with a similar index based on the price of a Starbucks tall latte.

Purchasing power parity is the measure of the buying power of a currency in its home country, as opposed to the value of the currency according to its exchange rate on the forex market, and these may differ quite substantially. For example, a draught beer may cost £4 in a pub in the UK and R35 at one in South Africa. At the exchange rate of about R18 to the pound, you could get two draught beers in South Africa for the cost of a single one in the UK

(4 x 18 ÷ 35 = 2.06).

Says the Finder report: “While the cost of a coffee includes other variances that we haven’t included in our research, such as the cost of raw coffee, local labour costs and taxes, our index is an informal way to measure local prices for a common item against other countries.

“The study has two components: a coffee cost comparison and a currency valuation index. The coffee cost comparison converts the local cost of a tall latte into US dollars across all 76 countries. The currency valuation index takes into account the fact that dollar values alone are insufficient to determine how much a coffee actually costs in different countries since wages (as reflected in GDP) are higher in some countries than others. The index measures each country’s coffee cost to GDPper-capita ratio against the average trend across all countries. It measures the actual cost of a coffee compared with what a country’s GDP indicates it ought to be.”

On the coffee cost comparison, South Africa ranks 71st out of 76 countries (or the sixth cheapest). A Starbucks tall latte in Joburg cost $2.18. The cheapest coffee was found in Istanbul, Turkey, costing just $1.78. The most expensive coffee was from Copenhagen, Denmark, coming in at $6.05. A coffee bought in the US was $4.30, while one in the UK was $3.58.

Taking the GDP component into account, Finder suggests that the rand is about 30% undervalued against the dollar – in other words, on a purchasing power parity basis, the exchange rate, instead of about R15 to the dollar, should be about R11 to the dollar.