Dawie Roodt reveals rand’s fair value

The rand’s fair value ranges between R14.55 to the dollar and R16.99 to the dollar, meaning the market currently undervalues the rand due to South Africa’s poor economic performance and deteriorating state finances. 

This is feedback from the chief economist at the Efficient Group, Dawie Roodt, who outlined why the rand is undervalued at a post-budget webinar

The rand’s value broadly indicates what foreign investors think of South Africa and the country’s economic performance and financial health. 

Roodt and his team produced a barometer showing what the rand’s value means for how investors view the country. 

“This is a graph or a barometer telling us whether the currency’s exchange rate is the rand and if it is correctly priced currently,” Roodt said.

If the rand is ‘expensive’ on the barometer, then it is undervalued by the market, and if it is ‘cheap’, then it is overvalued. 

Ultimately, a currency should hover around the ‘fair’ value range, and its value should revert to this range. 

However, risks such as geopolitical tensions, poor economic performance, inappropriate fiscal policy, and inflation can result in a currency spending prolonged periods out of this range. 

“The rand is priced at around R19 rand to the US dollar, and you can see that is very expensive or, put differently, the rand is hugely undervalued,” he explained. 

The rand should trade at better than R17 to the US dollar, according to Roodt’s calculations. 

“The rand is completely out of line, and that’s an indication that foreigners are getting concerned about South Africa.”

Source: Efficient Group, Dawie Roodt

How Roodt calculates the value of the rand

Roodt has previously calculated the fair value of the rand to be around R16.50 to the US dollar using Purchasing Power Parity (PPP) and the currency’s historical undervaluation. 

To calculate the fair value of the rand, Roodt uses a basket of goods to calculate the purchasing power of the rand in a similar fashion to how The Economist’s Big Mac Index works. 

He then adds the historical average undervaluation of the rand versus the dollar to its PPP to get the rand’s fair value. 

A currency never trades exactly at its fair value and, in the case of the rand, always trades weaker than its fair value, so one has to factor in the undervaluation of the currency to get an accurate, fair value.

On average, the rand trades around 50% weaker than its fair value.

If nothing significant happens from now until the end of the year, the rand will drift stronger towards R17.50 to the USD, Roodt said. 

In the best-case scenario, the rand may even strengthen to R17.00/USD. 

The value of the rand follows a pattern where there is usually a momentary crisis, which results in a sharp decline in the rand’s value, followed by a gradual recovery to fair value. 

Thus, the rand should incrementally appreciate against the dollar over the next few years.

However, Roodt said this is highly unlikely due to the declining attractiveness of South Africa as an investment destination and the increased risk of investing in the country with potential sanctions looming. 

This depends a lot on the behaviour of politicians in South Africa, which means that, according to Roodt, something will happen before the end of 2023 to induce a temporary crisis. 

“We can expect our politicians to discover a crisis to impact the currency negatively,” Roodt said.