The South African rand is one of the world’s most undervalued currencies.

This is according to the “Big Mac Index” produced annually by the British newspaper The Economist.

It began 40 years ago as a way to compare the value of different currencies. According to The Economist it started as “a lighthearted guide to whether currencies are 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 burger) in any two countries.”

According to the index a Big Mac in the United States (US) costs $6.22 while it costs R56.90 in South Africa. This implies an exchange rate between the dollar and the rand of 9.15, when it was actually (at the time the index was published last month) 16.32. This means that the rand is 44% undervalued.

The index also calculated whether a currency was over- or undervalued against several other major currencies, including the euro, the British pound, the Chinese yuan, and the Japanese yen.

According to that, the rand was 51% undervalued against the euro, 53% undervalued against the pound, 11% undervalued against the yuan, and 13% overvalued against the yen.

According to the index, the most overvalued currency in the world is the Swiss franc. It was the most overvalued currency against the five base currencies measured in the index – being 45% overvalued against the dollar, 28% against the euro, 22% against the pound, 131% against the yuan, and 193% against the yen.

At the other end of the scale was the Indonesian rupiah, which was the most undervalued currency against the five base currencies.

It was 62% undervalued against the dollar, 66% against the euro, 68% against the pound, 39% against the yuan, and 23% against the yen.

The index does not suggest that the rand will suddenly strengthen to R9.15 to the dollar. It does, however, show how cheap South African goods and services are when measured in international currency terms. That makes the country attractive to foreign tourists and investors, but it also reflects the damage that weak growth, political uncertainty, and poor investor confidence have done to the rand over many years.

The way to think about a currency is as the share price of a country, and in South Africa’s case the consequence of its expropriation and empowerment policies has created enough investor concern to push that share price way down. South African investors need to be careful, therefore, about a counter-intuitive risk that if a real economic reform process is driven by a future South African government, the currency could easily come back from its current level of between 16 to 17 to the US dollar to a level closer to 10 to 12. For many South Africans who've done well on betting against the rand this is a factor to keep watch of, although it is not the most probable outcome for the currency.