The econometric and forecasting models for Indonesia no-oil gas exports to the major markets

Abstract

The decline in oil prices has led the changes of Indonesia trade from oil to non-oil exports since the mid 1980s. But some doubts arose about non-oil exports prospects in the future. On the other hand, Japan, Singapore and United States of America (USA) continued to be the major markets for Indonesia products. Thus, analyzing the changes of commodities, major markets and factors that influence the exports as well as forecasting the exports are needed in order to promote Indonesia exports in the future. As the first objective of this research, analyzing Indonesia exports by commodities had been done by descriptive approach. In 1985, non-oil/gas and oil/gas exports showed relatively the same amount. Then, the non-oil/gas exports showed increasing trend while the oil/gas exports was relatively stable. In 2001, the difference between total exports of oil/gas and non-oil/gas exports was significant. The total amount of non-oil/gas was 57917 millions of USD, while oil/gas was only 6905 millions of USD. This fact indicated that non-oil exports would have good prospects in the future. The second objective is to describe Indonesia exports performances to Japan, USA and Singapore had also been done by descriptive approach. Over the 1985-2002 period, exports volume to Japan, USA and Singapore increased. But the total share of these three countries decreased from around 77% in 1985 to 45% in 2002. This fact indicates that Indonesia has been successful in diversifying its exports markets. However, the trend of trade Intensity that expresses the strength of regional relationship was decreasing. The strongest Indonesia trade intensity among three countries was with Singapore, but the most stable was with USA. Although Indonesia trade intensity with Japan (TIJ) decreased, but TIJ-5.3 indicated that Japan still became important market for Indonesia products. Considering the importance of non-oil/gas exports, third objective was to analyze the variables that influence Indonesia non-oil/gas exports to Japan, Singapore and USA by using multiple linear regression model. The parameters were estimated by ordinary least squares method. Because of multicollinearity among independent variables, principal component analysis must be done. The analysis concluded that population, exchange rates and lagged export have significant and positive influences for Indonesia non-oil/gas exports to Singapore, USA and Japan. The external factors such as international interest rate (IRS and IRL) and trade intensity in most models are not significant. Foreign income is only significant in non-oil/gas exports to Singapore. The last objective of this research was to forecast Indonesia non-oil/gas exports for the next 10 years. Decomposition, Winter's method, trend analysis and ARIMA were compared to decide the best method for forecasting. Multiplicative decomposition method was chosen because generally it had the smallest MAPE, MAD and MSD. Generally, non-oil exports to Japan, Singapore and USA will increase. While exports to Japan and USA seemed to have similar trend, exports to Singapore showed different trend. The fluctuation of non-oil/gas exports to Japan and USA created a cycle every 3 years. that might because in every 3 years there are changes in Indonesia government's policy. The fluctuation of non-oil/gas exports to Singapore created a cycle every 6 years. It indicated more stable trade relationship.