Posted on September 03, 2020 at 11:00 PM

BurgerNomics – How the Economist provides an alternate view to FX rates

There are many different ways to price one currency against the other. The one that matters is the official market price on the currency market. But some of the alternative pricing mechanisms give us an insight into the true worth of a currency that may be hidden in the market price.

One such index is the Big Mac Index that was created by The Economist. The Big Mac Index takes the price of the ubiquitous Big Mac from various cities and assumed a perfect market where the prices across the different countries should be reflective of only the FX rates. Supply chain efficiencies/inefficiencies, transport infrastructure etc. are to be ignored in such an index. Clearly this is not the case in a real world.

While the interactive tool built the Economist does a great job in collecting the data and providing it in a rich manner, it does fall short of quickly being able to find what may appear to be the most over-priced and under-priced currencies. Thankfully, their GitHub page provides the raw data for us to examine the way we would want to -

A Big Mac, pegged at USD 5.71 in the US is the most overvalued in the following countries (descending order). This data is based on FX rates from Reuters and Big Mac local prices as collected by the Economist. All FX rate information is dated as of July 1, 2020.

BigMac Index July 1, 2020

Overvalued currencies:

There are only 3 countries where the Big Mac is priced higher than the market rate in terms of USD. These three are as follows:

  • A. Switzerland – Where the cost of living is on the high side. The top 6 cities in the world where cost of living is tracked are all Swiss cities - Perhaps a high priced Big Mac is something that Swiss are used to and McDonalds franchisees can get away with.
  • B. Lebanon – Despite all the on going troubles (economic and political), the Big Mac is overvalued only by 4%.
  • C. Sweden – Where the Big Mac is overpriced by a mere 1%.

In all other countries, the cost of a Big Mac is lower than in the US on a purchase parity basis if we look Big Macs alone. Of all such countries here are 3 countries that may have the most undervalued currencies.

A. South Africa

Quite often, what seems to be screaming bargain turns out to be falling knife. Debt and Deficit in South Africa seem to be displaying a worrisome trend.

Debt Blowout

While it may appear that the Rand is holding its own, the report from Bloomberg (link provided above) and the looming debt and deficit situations are great cause for worry.

B. Russia

While the Russian ruble does show a bit of range that it trades in, in the medium term, the immediate future is a bit unclear.

Impacted negatively by the global slow down due to the Covid19 and the resulting decline in oil prices, Russia face a tight economic squeeze.

After a blip, the stock markets may have recovered, but the future of raw crude is what will determine the stat of the Ruble.

From a fiscal perspective, Russia continue to generate a surplus, but on just. This make the future hard to predict.

C. Turkey

The time to buy in Turkey may have passed as the stock market is of its lows. In March of 2020, you could have bought the index in Turkey at prices last seen March 2013. The future may offer an opportunity to test or come close to those lows again as the economy is expected to shrink due to the aftermath of the Covid 19.

While the stock market may have bounced back, the currency market is on a one way trend

All 3 countries require investors to have strong stomachs in case you are thinking of investing in them.

Country Name Over valuation compared to the US $
Switzerland 21%
Lebanon 4%
Sweden 1%
United States 0%
Norway 21%
Canada -11%
Israel -13%
Euro area -16%
Denmark -20%
Australia -20%
New Zealand -24%
Uruguay -24%
Britain -25%
Singapore -26%
Thailand -29%
Costa Rica -29%
United Arab Emirates -30%
Brazil -31%
Czech Republic -33%
South Korea -34%
Kuwait -35%
Saudi Arabia -35%
Bahrain -35%
Sri Lanka -36%
Japan -36%
Qatar -37%
Honduras -38%
Argentina -39%
Nicaragua -39%
Chile -39%
Peru -40%
Croatia -42%
Pakistan -42%
Colombia -42%
Guatemala -43%
Jordan -43%
China -46%
Hungary -49%
Philippines -50%
Oman -50%
Vietnam -50%
Poland -51%
Moldova -52%
Hong Kong -54%
Egypt -54%
India -56%
Taiwan -57%
Indonesia -59%
Malaysia -59%
Azerbaijan -59%
Romania -59%
Mexico -61%
Ukraine -62%
Turkey -64%
Russia -67%
South Africa -67%

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