Asymmetrical Exchange Rates Effect on Indonesia's  Trade Balance in Tourism

Teuku Zulham,Akbar Maulana,Taufiq Carnegie Dawood

doi:10.15294/jejak.v14i1.27234

Abstract

The main objective of this research is to analyze the effect of depreciation and real exchange rate appreciation on Indonesia's tourism trade balance bilaterally against Australia, China, Japan, Malaysia, and Singapore. Such analysis on bilateral relations have never been studied for developing markets countries, namely Indonesia. This study uses a linear ARDL approach and a nonlinear ARDL approach with the dependent variable on the tourism trade balance and the real exchange rate as independent variables. Income, foreign direct investment (FDI), and natural disasters as control variables. The empirical results show that Chinese and Japanese tourists respond positively to the depreciation in the real currency rate of exchange, thereby increasing Indonesia's tourism trade balance. Nonlinear ARDL shows that the relation concerning the real rate of exchange plus the balance of trade is non-symmetrical with respect to China and Japan, while Australia, Malaysia, and Singapore are symmetrical. These results suggest that the government should formulate policies to increase tourist visits from China and Japan. Further empirical results also found a J-curve pattern in Indonesia-China and Indonesia-Japan.

Highlights

The tourism sector is the fastest growing service sector in recent years
Where lnTBTi,t is the arrival rate of the country tourists i who enter Indonesia minus with the departure of Indonesian tourists to the same country; lnYidn,t and lnYi,t is an Indonesian income and its trade counterpart country at the time of t; FDIi,t is a foreign investment into the Indonesian tourism sector at the time of t, lnNDSi,t is the frequency natural disaster that occurred in Indonesia at the time of t; And lnRERi,t is a bilateral real exchange rate between Rupiah and the currency of its partner country at the time of t
From the Augmented Dickey-Fuller (ADF) and PP unit tests it is found that the bilateral real exchange rate, foreign gross domestic product (GDP), foreign direct investment in Indonesian sector and the frequency of natural disaster are integrated of order zero (I(0))

Summary

INTRODUCTION

The tourism sector is the fastest growing service sector in recent years. In 2018, tourism growth grew 3.9 percent, which is above the global economic growth of 3.2 percent. 5 largest Inbound tourist countries to Indonesia 2014-2018 The government can make a number of policies to overcome the trade balance deficit. The Marshall-Lerner condition shows the condition in which a country can correct its trade balance deficit within the long-term through currency depreciation (Bahmani-Oskooee, 1985) This causes imports to become expensive following decreasing demand after depreciation and the volume of exports increases due to changes in relative prices. The study conducted by (Dogru, Isik & Sirakaya-Turk, 2019) analyzed the effect of depreciation and the rate of exchange appreciation towards the US trade balance of tourism against Mexico, Canada, and the United Kingdom. The author's knowledge, this study was the first to analyze the asymmetric influence of the exchange rate on the tourism trade balance for Indonesia which is the emerging market in the Asia region. The last section concludes the paper and provides some policy recommendations

METHOD

Findings

AND DISCUSSION