-  Bank Negara Malaysia (BNM) kept the Overnight Policy Rate (OPR) at 3.00% yesterday, which was in line with both our and consensus expectations.

-  BNM had highlighted that growth will remain anchored by domestic demand with additional support from the improved external environment.

-  Meanwhile, BNM anticipates higher prices due to higher domestic cost factors. As of YTD 1Q14, prices grew by 3.4% YoY.

-  Separately, the international reserves advanced for the first time in April after five straight months of contraction. Overall reserves amounted to USD131.2bil (or +0.8% MoM) in April. The reserves position is sufficient to finance 9.4 months of retained imports and is 3.3 times the short-term external debt.

-  That said, domestic growth is expected to soften as recent indicators signal slowdown in private consumption. Ongoing challenges for private consumption expenditure include the anticipation of further subsidy reforms and weaker domestic sentiments.

-  M3 and leading indicators for the banking sector point to a softer outlook during 1Q14. Loan applications had picked up pace in March but loan approvals slowed down due to stringent lending practices.

-  As such, GDP contribution of aggregate domestic demand will likely soften in 2014. Note that the contribution of aggregate domestic demand to GDP surged to 93.1% in 2013 from 82.5% in 2008.

-  Nonetheless, the slowdown in domestic growth will be compensated by improvements in net trades. Exports will continue to benefit from the recovery in the advanced economies and growing demand regionally.

-  In nominal terms, net trades had registered a surplus of RM26.39bil (or +RM10.04bil YoY) in 1Q14. Should international trade stays resilient, trade balance could register a healthy surplus of RM104.2bil in 2014 (2013: RM70.63bil).

-  Net trades will likely revert to positive growth contribution to full-year GDP for the first time since 2009. We note that overall net trades will probably account for 1.8ppt in contribution to real GDP growth in 2014 (2013: -2.0ppt).

-  No change to our year-end interest rate projection of 3.25% for Malaysia. Given the current economic climate, we expect a one-time 25bps increase in the OPR during 2H14. 

Source: AmeSecurities