JAKARTA—Indonesia’s economy posted a $1.07 billion trade surplus in the first quarter, as exports picked up in March on the back of a weaker currency and imports continued to contract.

Inflation also moderated, with consumer prices growing 7.25% on year in April. Monthly price growth regularly came in above 8% last year after the government raised fuel prices, but the effects of that hike have begun to wane.

 

Taken together, the data shows that Indonesia is winning a battle to restore foreign investor confidence in its economy. The rupiah was among the world’s worst performing currencies last year, dropping 21% against the U.S. dollar, as the country’s large current-account deficit led to big capital outflows.

Foreign investors got cold feet over the economy, believing it was living beyond its means by importing too many consumer goods and relying on foreign financing to fuel a growth in credit. At the same time, exports of commodities to China—Indonesia’s major trade partner—cooled as China’s growth slowed.

Indonesia’s central bank responded with a series of interest rate increases totaling 1.75 percentage points between June and November that have pushed economic growth rates below 6%. The tighter monetary policy has choked off imports. Exports have begun to recover due to a weaker local currency and still robust demand from China for commodities.

The trade surplus in the first quarter compares with a deficit of $234 million in the first quarter of 2013. The figure was above expectations as the rupiah gained over 7% against the dollar in the first quarter as investors began to regain confidence in the country’s economic management.

Exports rose 1.2% on year in March. Imports in the month fell 2.3%, leaving a trade surplus of $673 million, above economists’ expectations of $520 million. A boost in palm oil exports and improving shipments of manufactured goods helped counter a drag from oil and gas sales. A ban on some unprocessed commodity exports, especially nickel, was another negative.

Hak Bin Chua, an economist at Bank of America-Merrill Lynch, estimated the current-account deficit, which measures trade and one-time transfers, stood at 1.8% of gross domestic product in the first quarter versus 2% in the final three months of 2014.

Indonesia’s statistics office also announced inflation continued trending down to 7.25% in April from 7.32% in March as harvest season helped boost food supply. The downtrend will likely continue with many analysts forecasting inflation of around 5% by the end of the year as the impact of last year’s fuel price increase wears off.

The “gradual moderation in inflation will continue to offer comfort to Bank Indonesia,” Barclays analysts Wai Ho Leong and Bill Diviney said in a note. The rate hikes last year have led to higher lending rates, crimping bank credit and damping local demand, they said.

Bank Indonesia Governor Agus Martowardojo has indicated the bank will remain hawkish for some time. Barclays expects the bank to start easing monetary policy in the first half of next year.

The bank’s efforts to restore stability, and moderating inflation, mean the rupiah should continue to appreciate this year, some analysts say. The currency lost around 2% against the dollar in April, after strength in the first quarter.

ING economist Tim Condon believes the central bank intervened last month to weaken the currency, in an attempt to further narrow the current-account deficit. ING still expects the currency to appreciate to 10,800 to the dollar by year-end versus around 11,500 now.