Big Mac Index: Most ASEAN Currencies Undervalued… And This Is Not Over

The “Big Mac Index” created by the Economist shows that all ASEAN currencies are now undervalued compared to the US dollar. Further local currencies’ devaluations will accentuate the difference.
Since 1986, UK leading news magazine “the Economist” publishes twice a year the “Big Mac Index”. What does this index mean? According to the magazine, the index is 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”.
The Big Mac is an homogenous product which is available exactly in the same shape, weight and format across the globe. It is a perfect tool for comparison due to its unique global standard status. For example, the average price of a Big Mac in America in July 2015 was $4.79; in China it was only $2.74 at market exchange rates. So the “raw” Big Mac index says that the yuan was undervalued by 43% at that time. However, looking to the adjusted index -which takes into consideration the GDP per capita in purchasing power parity (a measure which provides the real purchasing power of the local currency), the yuan was only undervalued by 9.3%.
Looking now at ASEAN countries for the same month of July, the Big Mac “raw” index shows that all local currencies are already undervalued compared to the US dollar, from 24.7% lower than its PPP value for the Filipino Peso to 58% for the Malaysian Ringgit, the worst performing currency if we look at the Big Mac index.
However, by considering the GDP-adjusted index, the situation looks different. Philippines currency is overvalued at most in ASEAN, by 26.7% while Thailand currency was described by the Big Mac Index as overvalued by 7.8%. However, the recent devaluation of the Baht to the dollar – it is now down to 36.1 baht for one dollar compared to 34.1 Baht for one dollar in July will certainly readjust the Thai Baht to a better value…