Bracing for Impact

Introduction Based on feedback from our CEO and CFO Forum members, we are pleased to put together this inaugural issue of APAC Watch , a quarterly briefing covering 12 major economies across the APAC region, from West Asia all the way through to North Asia and Oceania. Each country's brief is divided into two sections. One summarises political and policy developments while the other gives a view on markets and macroeconomy. Feel free to skip directly to any region or country that interests you using the navigation menu and explore datapoints by interacting with the graphs .

This edition was written with the shadow of war in Iran looming large over the global economy. Its effects are visible across much of what follows. We have presented both the base case and the worst case scenario for each of these countries, but which of the two proves closer to reality will only become clear in the weeks ahead as the war either drags on or finds a swift resolution.

. East Asia . China . Politics and Policy . Policy discipline over strong stimulus.

China is increasingly prioritising ‘high-quality development’ over headline growth, with a focus on technological self-reliance, industrial upgradation and tighter control of financial risks, particularly in the real-estate sector. These priorities were reinforced at the March 2026 National People’s Congress, which set a growth target of 4.5-5% (the lowest since 1991) while raising the fiscal deficit target to 4% (up from 3%). It also encouraged the increased issuance of local government special bonds to support infrastructure and strategic sectors. This was accompanied by a detailed set of economic and social targets, including urban unemployment of <5.5%, the creation of over 12 mn urban jobs and an inflation target of 2%. Renewed commitments were made to ensure BoP stability, reduce energy intensity and align income growth with GDP growth.

The breadth of these targets highlights a shift away from single-minded growth maximisation towards balancing employment, income stability and sustainability. Crucially, stimulus measures remain targeted rather than broad-based, with support directed towards advanced manufacturing, green energy and consumption at the margins. However, the absence of aggressive stimulus also underscores a more constrained policy approach, where growth is managed within structural limits rather than driven by large-scale demand creation. The result is a policy environment that remains interventionist and predictable, but more constrained.

Strategic autonomy amid external pressures.

Externally, China’s policy environment continues to be shaped by geopolitical competition. US export controls on advanced semiconductors and continued tariff pressures, with average tariffs on Chinese goods now standing at ~47.5% following de-escalation from a peak of 145%, have accelerated Beijing’s push for domestic substitution, particularly in chips, AI and advanced manufacturing. At the same time, China has deepened its strategic alignment with Russia, with the bilateral trade crossing $240 bn and energy cooperation expanding through long-term oil and gas agreements, helping offset Western pressure. Engagement in West Asia has also remained active, with continued ties to Iran forming part of a broader strategy to secure energy supplies and expand China’s influence in the region. Relations with India have stabilised following the 2024 border disengagement agreement, with subsequent military and diplomatic engagements focused on maintaining border stability and gradually restoring economic interaction, even as underlying strategic tensions persist.

. Outlook for the Markets . Investment and industry drive growth

China’s economy grew by 5% in 2025 meeting the government's official target and concluding the 14th Five-Year Plan period. However, momentum softened through the year, from 5.4% in the first quarter to 4.5% in Q4, with QoQ growth at 1.2%. Going into 2026, manufacturing growth stood at 6.6% in Jan-Feb, with equipment manufacturing driving this uptick (+9.3%) and accounting for nearly half of total industrial growth. High-tech manufacturing expanded by 13% and electronics by 14%, supported by strong global demand linked to AI and digital infrastructure. Pharmaceuticals saw a recovery (+7.2%, up from -0.1% in the same period last year), while automotive output slowed to 3.4% from 12% in Jan-Feb 2025. However, the official manufacturing PMI contracted for a second consecutive month, suggesting that conditions across the broader manufacturing base remain soft. This points to a diverging industrial economy, with priority and export-oriented sectors pulling ahead of more traditional segments. Fixed asset investment rose by 1.8% in the same period, with infrastructure investment growing by 11.4% and high-tech investment by 5.1%, offsetting a continued contraction (-11%) in real estate investment. At the same time, private investment fell by 2.6%, indicating that the recovery remains driven by state-backed activity rather than a broad-based improvement in business confidence.

. Trade resilience, demand constraints

. External trade continues to provide support, with China’s trade surplus widening to nearly $1.2 tr in 2025, driven by exports worth $3.8 tr (+5.5% YoY). This external strength carried into 2026, with exports rising 19.2% and imports 17.1% on average in Jan–Feb 26. Cumulatively, the total two-way goods trade amounted to ~$1.1 tr in the same period, with 28% growth in February alone. Exports in the two months rose by 22% with growth concentrated in high-value sectors. Electromechanical exports, for instance, grew by over 40% y-o-y, while integrated circuit exports surged by over 60% and shipments of solar cells, lithium-ion batteries and electric vehicles by over 50%, indicating strong global demand for China’s advanced manufacturing base. Trade diversification is also evident, with exports to ASEAN rising by over 22% and shipments to Africa increasing by nearly 50%, offsetting a 15% decline in exports to the US.

. Domestic demand, however, remains more subdued. CPI inflation stood at 0.8% in February, indicating limited demand-side pressure. Retail sales, meanwhile, grew by just 2.8% in Jan-Feb, despite a seasonal boost from the Chinese New Year, while MoM growth remained weak at 0.8%. Moreover, consumption trends have been uneven: sales of food and apparel rose by over 10%, while vehicle sales declined by 7.3%, indicating continued weakness in big-ticket consumption. Services activity expanded by 5.6%, outpacing goods consumption, while online retail sales grew by over 9%, highlighting a shift towards lower-cost and digital channels. Producer prices declined by 0.9% YoY in February, easing from a 1.4% decline the previous month, marking the mildest contraction since 2024 but still signalling continuing downward pressures on industrial producers.

. External surplus, fragile confidence

. The renminbi held broadly at ~7.2/$ over 2025 and foreign exchange reserves swelled to $3.3 tr, with the authorities absorbing inflows to prevent excessive currency appreciation, which would otherwise erode export competitiveness. On FDI, the picture is more sobering: the use of foreign capital declined by 5.7% YoY in Jan-Feb, following a 9.5% decline in 2025, the third consecutive annual decline. This reflects lingering concerns among global investors over policy predictability and the strength of domestic demand. At the same time, inflows into high-tech sectors increased by over 20%, accounting for ~40% of total FDI, with notable gains in e-Commerce services, medical equipment manufacturing and aerospace. Policy is being used to manage this imbalance. Fiscal support has been scaled up significantly, with total effective support reaching nearly RMB 12 trillion ($ 1.7 tr) through bonds and other instruments, while monetary policy has shifted to an ‘appropriately accommodative’ stance, signalling potential rate and reserve requirement cuts. Together, this points to an economy where external trade and state-led investment continue to underpin growth, while weaker private and foreign investment suggest that confidence in the broader domestic recovery remains fragile.

. Hong Kong . Politics and Policy . Hong Kong’s opposition has been decimated

Hong Kong’s political landscape is now entirely pro-Beijing, with no meaningful opposition remaining and governance increasingly aligned with the mainland’s priorities. Chief Executive John Lee’s administration pushes all legislation through a ‘patriots-only’ Legislative Council following the 2021 electoral overhaul that restricted candidacy to government-approved figures. The city’s last active pro-democracy organisation dissolved in June 2025. In February, media entrepreneur and democracy activist Jimmy Lai was sentenced to 20 years in prison under national security charges, drawing condemnation from the UK, EU and US. Mr Lee has also signalled that Hong Kong’s role is evolving from attracting foreign capital into China toward serving as a launchpad for mainland Chinese firms expanding globally, reflecting a structural shift in the city’s economic positioning.

. Hong Kong sits at the intersection of a cautiously warming India-China relationship

Hong Kong sits squarely within the dynamics of China’s external relations, with India emerging as a potential beneficiary of the city’s intermediary role. Beijing has reiterated that the ‘one country, two systems’ framework will continue beyond 2047, presenting Hong Kong as a bridge between China and the global economy. India-China relations improved over the course of 2025, highlighted by a meeting between Narendra Modi and Xi Jinping in Tianjin in September and the resumption of direct flights after a 5-year suspension. During the period of suspended connectivity, Hong Kong maintained air and trade links between India and mainland China. The city’s common law system, bilingual environment and established financial infrastructure continue to position it as a gateway through which Indian firms and institutions engage with Greater China. India has also begun to cautiously ease restrictions on Chinese investment, with selective approvals under the Press Note 3 framework resuming in sectors such as electronics manufacturing and supply chains, signalling a calibrated reopening after several years of heightened scrutiny.

. New policy initiatives in AI, digital assets and life sciences

Together, the 2025 Policy Address (the government’s annual policy blueprint delivered by the Chief Executive) and the 2026 Budget introduce substantive policy initiatives in AI, digital assets, life sciences and cross-border industrial development. A combined ~US$511 mn has been allocated for a new AI R&D Institute and a subsidy scheme supporting AI adoption by universities and enterprises. Authorities are also preparing legislation establishing a licensing regime for digital-asset dealers and custodians, creating a regulated framework for fintech and cryptocurrency activity. Additional measures include revisions to the Capital Investment Entrant Scheme and the establishment of Hong Kong’s first semiconductor manufacturing innovation centre at Yuen Long InnoPark, aligning the city’s economic strategy with China’s 15th Five-Year Plan (2026–2030).

. Outlook for the Markets . Growth strengthens for a third consecutive year

Hong Kong’s economy strengthened last year, with real GDP expanding by 3.5%, marking a third successive year of growth. The expansion was supported by strong goods exports, recovering inbound tourism and increased cross-boundary financial services activity, alongside a modest (1.7%) recovery in private consumption. The 2026-27 Budget reports a consolidated fiscal surplus of $370 mn for 2025-26, reversing a $8.6 bn deficit the previous year, supported largely by stronger-than-expected stamp duty revenues from equity market activity. The government forecasts GDP growth of 2.5-3.5% in 2026, with external trade expected to remain the primary driver, though US tariff policy and broader geopolitical tensions are identified as the main downside risks.

. Inflation remains contained; labour market shows signs of stabilisation

Inflation remained subdued, with the headline Composite CPI rising 1.1% YoY in January, continuing a trend of contained price pressures through 2025. Price dynamics have been influenced in part by changes in government relief measures, including lower electricity subsidies and rate concessions, rather than underlying demand pressures. The seasonally adjusted unemployment rate peaked at 3.9% in the September-ending quarter before retreating to 3.8% in Oct-Dec (Q4), though the underemployment rate rose to 1.7% in Q4 from 1.1% a year earlier, pointing to some residual slack in the labour market.

. Capital markets are thriving

The Hang Seng Index closed 2025 up 28%, and Hong Kong ranked first globally for IPO fundraising in 2025, with total equity capital raised leaping 236% to $83 bn. Stamp duty revenues reached $12.8 bn in 2025-26, though land premium revenues remain significantly below pre-2021 levels, underscoring continued weakness in the commercial property market. The 2026-27 Budget strengthens tax arrangements for corporate treasury centres and international trading functions, promotes Hong Kong as a regional intellectual property trading centre and establishes a $1.3 bn Innovation and Technology Industry-Oriented Fund. Corporate profits tax remains unchanged at 16.5%, with the first $256,000 of profits taxed at 8.25% under the two-tier regime, preserving Hong Kong’s competitive low-tax environment.

. Japan . Politics and Policy . Japan's LDP wins a historic mandate under its first female Prime Minister

Japan's Liberal Democratic Party (LDP) secured its biggest-ever electoral victory, capturing 316 seats in the Diet's lower house, well above the 233 needed for a majority, and winning control of all 17 parliamentary committees. Leading the party is Sanae Takaichi, Japan's first female PM, who won broad appeal through her direct communication style, her non-political, middle-class background and her visible diplomatic outreach, including a widely covered interaction with South Korean President Lee Jae-myung. The main opposition, the Centrist Reform Alliance (CRA), formed only weeks before the election through a merger of the Constitutional Democratic Party of Japan and the Buddhist-backed Komeito , failed to project coherence or dynamism, with both its leaders aged over 65. Younger voters meanwhile continued to drift towards more issue-driven parties such as Nippon Ishin and the Democratic Party for the People , a trend that will remain a structural pressure point for the LDP.

. Takaichi pushes a bold agenda on defence and the constitution, alarming Beijing

Armed with a commanding mandate, Ms Takaichi has vowed to cut taxes, raise defence spending towards 2% of GDP and revise Japan's post-war pacifist constitution, which constrains the Self-Defence Forces. Beijing has reacted sharply, warning Tokyo to 'follow the path of peaceful development rather than return to militarism,' and had already launched military provocations and coercive economic measures following Ms Takaichi's comments on Taiwan in late 2025. Other Asian states, however, view a more capable Japan favourably, seeing it as an important partner in building independent defence capabilities as China continues to project military power. Ms Takaichi is expected to deepen security partnerships with India and Southeast Asia, while Japan remains formally anchored in the US alliance, even as doubts persist about Washington's long-term reliability in the region.

. Demographic decline and economic pressures constrain the government's room to manoeuvre

Japan's structural headwinds are well documented but bear framing against Ms Takaichi's agenda. With 21.8 million of 122.57 million people aged 75 or above, social security costs are rising and the working-age population is shrinking, leaving limited political capital to simultaneously cut taxes, raise defence spending and revise the constitution. If visible economic relief does not materialise early in her term, Ms Takaichi’s commanding parliamentary majority may prove less durable than it looks.

. India ties deepen on security, technology and supply chains; key openings for Indian businesses

Japan-India relations are on a strong upward trajectory, anchored in the 'Japan-India Joint Vision for the Next Decade' announced during PM Modi's August 2025 visit, which identified five priority areas for economic security cooperation: semiconductors, critical minerals, ICT, clean energy and pharmaceuticals. Further high-level talks are planned for the first half of 2026, alongside a Joint Working Group on critical minerals. For Indian firms in semiconductors, pharma, clean energy and AI, this bilateral framework offers structured, government-backed pathways into the Japanese market.

. Outlook for the Markets . Growth recovers modestly in Q4 but remains fragile as the BoJ tightens cautiously

Japan's economy contracted 0.7% QoQ in Q3 (Jul-Sep) as US tariffs hit exports, before rebounding to 0.3% in Q4, supported by private consumption (0.3%) and business investment (1.2%). Net trade made no contribution to growth, however, and private consumption remains constrained by cost-of-living pressures. On monetary policy, headline inflation fell to 1.5% in January 2026, its lowest since March 2022 and the first sub-2% reading in 45 months. The BoJ raised its policy rate to 0.75% in December, its highest since 1995, and held in January 2026. A tension is emerging between the BoJ's tightening path and PM Takaichi's fiscal stimulus agenda, including proposals to suspend the 8% food tax and cut fuel duties, which the IMF has warned would erode fiscal space.

. A record tourism boom is at risk as the yen weakens further and Chinese arrivals fall

The yen has traded at 152-159/$ in recent months, with fresh weakness in March driven by rising oil prices stemming from the US-Israeli conflict with Iran, a significant pressure point for an economy almost entirely dependent on Middle Eastern energy imports. On the tourism front, Japan recorded a record 42.7 mn international visitors in 2025, up from 36.9 mn in 2024, with inbound spending approaching ¥10 trillion, according to JNTO . US arrivals exceeded 3 mn for the first time. However, Chinese arrivals fell approximately 45% year-on-year in December following Beijing's discouragement of Japan travel in response to Ms Takaichi's Taiwan remarks, a risk that could weigh on 2026 visitor numbers.

. Record wage growth offers relief but ageing demographics and rising debt cloud the outlook

Wage demands under the 2026 annual Shunto (spring) negotiations climbed to 5.94%, their highest in decades. However, r eal wages declined for a 4 consecutive year in 2025, narrowing to just -0.1% in December, with analysts at Itochu Research Institute forecasting a return to positive territory in 2026. Structurally, with the working age population shrinking, defence spending rising and with planned tax cuts, Japan's public debt, already > 230% of GDP, faces sustained upward pressure.

. South Korea . Politics and Policy . A new president, a familiar bind

President Lee Jae-myung assumed office in June 2025 through an early election triggered by former president Yoon Suk-yeol’s failed attempt to impose martial law and subsequent impeachment, deepening domestic polarisation and institutional strain. Mr Lee entered office with a dual mandate of stabilising a fractured political environment and rebalance growth towards households, with household debt now at ~93% of GDP, the second highest globally, while the working-age population continues to contract. Together, these limit the scope for aggressive demand side stimulus and raise the cost of policy missteps. This tension is reflected in the FY26 budget, which ramps up government spending by 8.1%, to KRW 728 tn ($505 bn). With the fiscal deficit near 4% of GDP, policy is leaning towards supporting growth while remaining within prudent fiscal bounds.

. A $350 bn bet on the US supply chain

South Korea has taken a decisive step to anchor its industrial base within US supply chains. The National Assembly passed a special bill formalising a $350 bn investment commitment in strategic US industries under a trade deal struck in November. Both the scale and the bipartisan nature of the vote underline a clear strategic priority. Embedding Korean industry within US production ecosystems is seen as the most effective hedge against tariff risks and trade disruption. This reduces near-term policy uncertainty but increases long-term exposure to US demand cycles and political shifts.

. Geopolitical pressure on multiple fronts

Navigating a complex geopolitical landscape shaped by US trade pressure, an assertive China, a more active Japan and a persistently hostile North Korea, President Lee aims to combine economic recalibration with active diplomacy. This includes fostering high-level engagement with China and a constructive outreach to Japan while avoiding entanglement in regional rivalries.

North Korea’s ballistic missile launches in March, in the backdrop of joint US-South Korea military exercises, underlined the persistent tensions facing the peninsula. At the same time, the US-Iran conflict has tightened global energy markets, buffeting import-dependent South Korea. With 70% of its crude imports passing through the Strait of Hormuz, the country faces a looming supply shock. The first warning sign has emerged in naphtha, a key petrochemical feedstock produced during crude refining. Naphtha-derived intermediate goods are essential to plastics, textiles, automobiles, electronics and construction. If naphtha runs dry, the manufacturing base that underpins South Korea’s export-driven economy risks grinding to a halt.

. India ties broaden, but remain structurally imbalanced

Economic engagement with India is expanding, particularly across semiconductors, shipbuilding and critical minerals, reflecting shared priorities around supply chain diversification. Trade flows, however, remain uneven. The bilateral trade reached approximately $27 bn in 2025, with a widening gap driven by strong South Korean exports in electronics, steel and petrochemicals. A more durable shift, however, is visible on the investment side. Defence manufacturing is emerging as a key pillar, highlighted by Hanwha Aerospace’s K9 howitzer contract with L&T. Both sides have set a $50 bn trade target by 2030, implying a significant scaling up of the current partnership.

. Outlook for the Markets . Monetary policy on hold as recovery remains export-led

The Bank of Korea held its base rate at 2.5% in February, marking the sixth consecutive pause following 100 bps of easing. Growth is recovering, with GDP projected at 2% in 2026, up from 1% in 2025, but momentum remains concentrated in semiconductors and ICT exports. Elevated household debt and housing market risks weaken the case for further easing, even as markets continue to expect rate cuts later in 2026.

Inflation near target with downside momentum but rising energy risks

Consumer price inflation eased to 2% in January from 2.3% in December, driven by slower increases in petroleum and agricultural prices. Core inflation remained stable at 2%, indicating limited underlying pressure. However, the outlook is less benign, with the recent sharp rise in global crude oil prices likely to feed through into domestic inflation.

The current account remains a core strength

South Korea’s external position continues to provide stability. The current account recorded a $13.3 bn surplus in January, and 2025 seeing a record $123 bn surplus. This reflects sustained strength in semiconductor exports and a prolonged run of monthly surpluses. Forex reserves remain adequate at $402 bn, up from $385 bn last year.

. Equity markets surge, but the Won weakens under external pressure

The KOSPI has delivered an annual return of 117%, one of the strongest equity performances globally, on the back of AI-driven semiconductor earnings and strong retail participation. However, volatility has increased. A slight correction in March, triggered by rising oil prices and geopolitical tensions, highlights growing sensitivity to macro risks.

. The Korean won has remained under sustained pressure, weakening to its lowest levels since 2009 at 1500 won per dollar amid rising oil import costs, capital outflows and interest rate differentials with the US. Central bank intervention has helped contain volatility but has not reversed the trend. For businesses, this creates a mixed impact, improving import competitiveness while increasing currency risk exposure.

. Labour markets stable, demographics a structural drag

Labour market conditions remain broadly stable, with strength in export-oriented manufacturing offset by weaker performance in domestic sectors such as retail and construction. Beneath this, demographic pressures are intensifying. Fertility indicators saw a cyclical uptick in 2025, with births rising to 254,500 (+6.8% YoY) and the fertility rate improving to 0.80 (from 0.75), driven by a larger ‘echo boomer’ cohort and a rebound in post-pandemic marriages. However, structural pressures remain. Deaths exceeded births by 108,900, extending population decline and South Korea continues to have the lowest fertility rate in the OECD, reinforcing long-term constraints on labour supply and productivity.

. Taiwan . Politics and Policy . A polarised political landscape with continuity in strategic direction

Taiwan currently has a divided government: the Democratic Progressive Party (DPP) controls the executive branch, while the opposition Kuomintang (KMT) controls the legislative branch in a coalition with the Taiwan People’s Party (TPP). Further, the KMT also holds the majority of local government positions. This has heightened policy negotiation and slowed consensus on key measures, particularly on defence spending and fiscal priorities. Despite this political divergence, the country’s broader strategic direction remains a constant. Taiwan continues to reject China’s ‘One Country, Two Systems’ framework, maintaining a status quo approach while strengthening defence preparedness and military readiness amid sustained cross-strait pressures. Economic policy is increasingly focused on diversification, with continued momentum behind the New Southbound agenda and deeper alignment with the US, Japan and Europe, leveraging Taiwan’s central role in the global semiconductor value chain. Yet structural vulnerabilities persist, particularly in terms of energy (it meets >95% of its requirements through imports), keeping supply security a key policy priority.

. A NT$1.25 trillion defence push: intent meets constraint

President Lai Ching-te has proposed a NT$1.25 tn ($40 bn) defence budget for procuring arms and building a ‘Taiwan Dome’ air-defence system with high-level detection and interception capabilities. In the face of US pressures, Mr Lai has committed to more than double defence spending, from 2.4% of GDP in 2024 to 5% by 2030. The strategic rationale – greater self-reliance, given uncertainties around US security guarantees – is clear. However, the final scale and timing of allocations will be shaped in no small part by active resistance from the opposition, which has concerns over both, the fiscal implications of new spending, and Mr Lee’s procurement strategy/priorities.

. Strategic uncertainty rises amid US-Iran conflict

The US-Iran conflict has further muddied Taiwan’s security outlook. US support remains explicit, with continued arms deliveries and reaffirmed political backing. However, its distribution of military assets across multiple theatres raises questions around response speed and operational flexibility in a Taiwan contingency. This also makes previously low-probability scenarios appear more tangible to Taiwanese strategic planners.

. India ties deepen, led by semiconductors

Economic engagement with India is scaling steadily, supported by trade expansion and a growing corporate presence. The bilateral trade reached $12.5 billion in 2025, demonstrating strong momentum. The relationship is also increasingly anchored in supply chain collaboration. Semiconductor investments, including the Tata Electronics-Powerchip partnership to build India's first commercial 12-inch wafer semiconductor fabrication facility in Dholera, Gujarat and the HCL-Foxconn semiconductor joint venture, point to the early stages of a more integrated industrial partnership. This shift remains commercially driven. India’s adherence to the One China Policy continues to limit formal diplomatic engagement, even as economic ties deepen and diversify.

. Outlook for the Markets . Growth remains elevated, driven by the AI cycle

Taiwan’s recent growth performance is exceptional for a high-income economy, with GDP expanding 8.7% in 2025 and by a massive 12.6% in Q4, according to the latest preliminary estimate. This year, Taiwan’s GDP is expected to grow by 7.7%, revised upwards by 4.2 percentage points from the previous forecast. Semiconductor exports, led by TSMC and its ecosystem, have become the core infrastructure layer of global AI investment. External demand outperformed expectations, driven by AI-led technology cycles, with real exports of goods and services rising 39%. Import growth remained strong at 25%, reflecting sustained demand momentum.

. Domestic demand improving, but secondary

Domestic demand is strengthening gradually but remains a secondary driver. Private fixed capital formation is projected to increase by 4.2% in 2026, building on a high (10.8%) base from last year. However, policy tightening has moderated housing activity while mortgage restrictions have reduced real estate lending as a share of total loans, softening broader investment trends. The economy’s limited reliance on property is a structural strength but also implies less internal cushioning if the export momentum slows.

. External position remains a core strength

Taiwan’s external balances continue to underpin macro stability. Forex reserves stood at $605 bn in February, up from $578 bn a year ago, providing significant buffer against external shocks. The current account surplus expanded to $69.9 billion in December, from USD 45.2 billion in the previous quarter, reflecting stronger external balances. This positions Taiwan with a strong financial cushion in a volatile global environment.

. The New Taiwan Dollar remains managed amidst volatility

The New Taiwan Dollar has seen a moderate, mainly linear 3% appreciation in the year to March, shaped by competing external forces. Appreciation pressures have come from a large current account surplus, while renewed dollar strength and higher oil prices linked to geopolitical tensions have driven periods of depreciation. The central bank continues to manage the currency within a broad range of 30-33/$, smoothing volatility rather than targeting a specific level, resulting in a currency that is flexible but not unconstrained.

. Southeast Asia & Oceania . Australia . Politics and Policy . State election highlights fragmentation on the political right

South Australia’s 21st March election returned Premier Peter Malinauskas’s Labor government comfortably, but the more important development was the sharp weakening of the state Liberal Party, (Australia’s main conservative opposition party), alongside a surge in support for One Nation. The result does not change federal policy directly, but it does reinforce a broader political trend: the Australian right is becoming more fragmented, with protest and populist votes increasingly flowing to minor parties rather than consolidating behind the Liberals. That matters federally because it makes it harder for the opposition to present a coherent national alternative and increases the risk of vote-splitting across the conservative bloc.

. Budget to test appetite for structural tax and housing reforms

The May 2026 budget is shaping up to be a key inflection point for domestic policy, centred on proposed changes to the capital gains tax discount, particularly for housing investors. With a strong parliamentary majority and a long runway before the next election, the government has the political space to pursue structural reforms aimed at addressing housing market distortions and declining home ownership. Alongside this, previously announced personal income tax cuts, reducing the lowest marginal rate from 16% to 15% in July 2026 and to 14% in 2027, will provide modest cost-of-living relief. IMF Article IV consultations have also highlighted the need for tax and housing-related reforms, and the budget is likely to signal a shift in that direction, though its political sensitivity will test the government’s mandate.

. Middle East conflict tests limits of AUKUS-linked deployments

The escalation of the US–Israel conflict with Iran in late February has drawn Australia into direct operational support, including via the deployment of an E-7A Wedgetail aircraft and personnel to the Gulf, alongside confirmed participation of Australian officers in US-led submarine operations. The government has framed this as a routine allied deployment under AUKUS arrangements, but it has triggered domestic debate over whether existing legislation adequately covers combat involvement under foreign command. The episode highlights a growing tension between Australia’s ‘defensive’ strategic posture and its deepening military integration with allies, with potential implications for both, future military deployment and parliamentary oversight of the process.

. Trade policy pivots as diversification accelerates amid global shifts

Australia’s trade strategy is entering a transition phase, balancing continued dependence on China with a more active diversification push. Two-way trade with China accounts for about 24% of Ausutralia’s total, anchored by iron ore, LNG and agricultural exports, but recent policy moves signal a shift. An October 2025 critical minerals agreement with the US, backed by over USD 2 billion in financing, and the near-finalisation of the EU–Australia FTA in March 2026 (which centres on minerals access and agricultural quotas) reflect efforts to broaden market access. The shift has been accelerated by rising trade uncertainty, including new US tariffs and supply chain realignments. Yet, while diversification is gaining momentum, Australia’s export profile remains structurally tied to Chinese demand, suggesting that any transition will be gradual.

. Outlook for the Markets . Growth supported by commodities, but momentum is set to ease

Australia’s GDP grew 0.8% QoQ in the December-ending quarter, bringing annual growth in 2025 to 2.6%, the strongest since 2022. This growth was led by agriculture and mining, which together contributed around half of the quarterly increase, supported by improved iron ore and coal output and favourable seasonal conditions. Services activity remained steady, with professional and financial services contributing to broader growth. However, the forward momentum is expected to soften as higher interest rates weigh on private demand, with the Reserve Bank of Australia projecting year-ending growth to slow to 1.8% in 2026, while the IMF estimates it at 2.1%.

. Inflation remains above target, keeping monetary policy restrictive

Headline inflation rose to 3.8% YoY in January, with trimmed mean inflation (a measure of underlying inflation that excludes extreme price changes ) at 3.4%, both above the RBA’s 2-3% target band. Domestic price pressures remain elevated, particularly in non-tradables such as housing and utilities. In response, the RBA reversed its 2025 easing cycle, raising the cash rate from 3.60% to 3.85% in February and to 4.10% in March, with further tightening possible. The trimmed mean inflation is expected to peak at ~3.7% in mid-2026 before easing gradually, suggesting policy will remain restrictive through FY27. The government is providing targeted relief through energy rebates and tax cuts to ease household pressures, rather than pursuing broad-based fiscal expansion.

. Consumption stabilises, but households remain cautious

Household consumption grew by 0.3% QoQ in the December quarter, marking a continued but modest recovery. Discretionary spending was supported by seasonal demand and promotional activity, though this was partly offset by a sharp decline in electricity and gas consumption following government rebates. The household saving ratio rose to 6.9%, its highest level since September 2022, indicating continued caution despite improving incomes. Consumer sentiment also weakened in early 2026 following rate hikes, suggesting that spending is likely to remain subdued as higher borrowing costs continue to weigh on household demand.

. Trade surplus narrows on gold imports and softer exports Australia's goods trade surplus fell to US$ 1.7 bn in January, down from $2.2 bn the previous month, as exports declined 0.9% to a 5-month low and imports rose 0.8%. The export-side weakness reflects softer rural goods shipments, while rising imports were driven almost entirely by a surge in gold purchases (excluding gold, imports fell by ~2%). The surplus remains well below last year's average of $2.7 bn, with a rising Australian dollar and booming data centre investment expected to keep imports elevated through 2026.

. External balances weaken despite continued capital inflows

Australia's current account deficit widened to $14.7 bn in Oct-Dec, its highest level in a decade, driven by a $1.7 bn increase in the primary income deficit. This, in turn, reflects both a rise in income paid to overseas investors (driven by stronger dividends from Australian firms), and a decline in income received from Australian investments abroad. The financial account remained in surplus at $5.6 bn in the December quarter, though it did decline shaprly QoQ. The RBA raised its cash rate by 25 bps to 4.1% at its March 2026 meeting, following a hike in February, amid renewed inflationary pressures in the second half of 2025. Tighter monetary policy may help moderate imported inflation but could weigh on export competitiveness going forward.

. Indonesia . Politics and Policy . Policy credibility concerns shape the early phase of the Prabowo administration

Indonesia faces tensions between the Prabowo administration’s pro-growth agenda and investor concerns around fiscal discipline and institutional independence. Markets reacted cautiously to a new flagship free-school-lunch program, estimated to cost IDR 450 trillion (~$28 bn or ~2% of GDP) annually. The program raises questions about Indonesia’s fiscal space and the government’s ability to maintain its statutory deficit ceiling of 3% of GDP.

These concerns have also intersected with debates around the independence of Bank Indonesia. The rupiah weakened from ~IDR 15,400/$ in September 2025 to ~IDR 16,900/$ by mid-March 2026, a drop of ~5.5%. In late January, it briefly touched IDR 16,971, levels unseen since the Asian Financial Crisis of 1998. Currency markets remained highly sensitive to policy signals and Bank Indonesia responded with active intervention in both the spot and the forward market. It may not, however, be able to sustain these measures, given declining forex reserves, which fell to a 3-month low of $152 bn in February.

. Capital market governance crisis triggers regulatory reforms

Indonesia's financial markets faced a governance shock in late January, when MSCI announced that it would freeze positive index changes for Indonesian stocks, citing persistent opacity in shareholding structures and concerns about the reliability of free float data used to assess investment eligibility. The decision raised the possibility that Indonesia could see its weighting within the MSCI Emerging Markets Index fall, or even face an outright reclassification to Frontier Market status, if material progress on transparency was not achieved by May 2026.

The announcement triggered severe volatility in equity markets. The Jakarta Composite Index fell 7.4% on January 28 th alone, the steepest single-day decline in over 9 months, with an intraday plunge of 8.8% triggering a temporary market halt. Over the two-day session on January 28–29, the sell-off erased approximately $80 bn in market capitalisation. The authorities responded rapidly. On January 29, the OJK and IDX announced immediate reform steps, including revised free float calculation methods and expanded ownership disclosure requirements. By early February, regulators had proposed doubling the minimum free float requirement for listed companies from 7.5% to 15%, with draft rules published for stakeholder consultation and full implementation targeted by end-April 2026. The episode highlighted the importance of regulatory credibility as Indonesia seeks to deepen international participation in its capital markets, with the May MSCI reassessment looming.

. Trade diplomacy and commodity strategy gain prominence

Commodity-related policies are key to Indonesia’s economic management, particularly in terms of nickel, which underpins global EV supply chains. The government has maintained strict export controls and continues to manage production quotas for nickel ore, with the aim of expanding domestic refining and battery material processing. The policy has global implications: Indonesia accounts for ~60% of the world’s nickel supply and these measures directly influence international prices and investment flows. At the same time, the government continues to advance its commodity down-streaming strategy, particularly in nickel and related battery supply chains. Mining permit quotas and production management policies have been used to shape supply, reinforcing Indonesia’s ambition to dominate EV mineral processing while increasing export value-add.

. Outlook for the Markets . Policy credibility and inflation remain key market variables

With inflation staying broadly within Bank Indonesia’s target corridor of 2.5% ±1%, the central bank held its benchmark policy rate at 4.75% at its January and February 2026 MPC meetings. (The rate has been unchanged since April 2024, when the previous tightening cycle peaked.) Headline inflation rose to 3.6% in January, from 2.6% in December, while core inflation stood at 2.45%, 5 bps higher than in the previous month. The Bank’s focus, instead, has been on exchange rate stability.

. The external sector remains a source of resilience. Indonesia maintained its trade surplus in January, with exports reaching $22.2 bn, a shade higher than imports ($21.2 bn). Continued strong commodity demand, particularly for energy and metals, has helped sustain export performance even as global trade conditions remain uncertain.

. Fiscal policy and industrial strategy will shape medium term growth

Government spending early in the year has accelerated under expanded social protection programs, most notably the Free Nutritious Meals programme for schoolchildren and pregnant mothers, which cost around IDR 71 tn (~$4.5 bn) in its inaugural year, with allocations continuing into 2026. Additional spends have been directed toward housing support and rural assistance schemes as part of the administration’s broader consumption support agenda.

At the same time, fiscal space remains constrained by Indonesia’s statutory fiscal deficit ceiling of 3% of GDP, reinstated in 2023 after being temporarily suspended during the pandemic (2020-22), when deficits widened to support crisis spending. Since the rule was restored, the government has committed to maintaining the deficit below the ceiling, with the 2025 budget targeting a deficit of ~2.5% of GDP.

. Singapore . Politics and Policy . Strong mandate, rising pressures

Last May’s general election handed PM Lawrence Wong’s People’s Action Party’s (PAP) another decisive mandate. After six decades in power, the PAP secured 87 of 97 seats, reaffirming public confidence within a more contested political landscape. Opposition parties such as the Progress Singapore Party (PSP) lost representation, while the Worker’s Party (WP) consolidated its position as the only credible opposition, increasing its seat share to 12 (including 2 extra nominated seats). Cost of living, housing affordability and inequality remained central voter concerns, with the WP also calling for greater opposition presence to check the PAP’s dominance. While the PAP was able to highlight measures to cushion rising costs, the challenge ahead lies in strengthening the social compact without undermining Singapore’s pro-business model.

. Targeted relief, policy continuity

This balancing act is already reflecting in policy. Budget 2025 and subsequent measures lean heavily on targeted household support, including distributing SGD 500 from May 2025 and another SGD 300 in January 2026 through the recurring CDC (digital cash voucher) program. This measure, which comes on top of utility and service rebates to offset household expenses, is emblematic of a calibrated response to cost-of-living concerns. For businesses, this should be viewed as the state trying to preserve domestic confidence while keeping Singapore attractive to investment rather than a structural shift in spending priorities or dramatic policy change.

. Hedging amid global fragmentation

Singapore’s response to US tariff actions has been to avoid retaliation and pursue clarification and negotiation. However, policymakers have warned that the real risk lies in the indirect hit to trade, demand and supply chains rather than tariff rates alone. For a highly trade-dependent economy, this vulnerability may be exacerbated by tensions in the Middle East, which have already amplified shipping costs and inflation risks globally. At the same time, ties with India have taken on greater strategic value: PM Wong’s September 2025 visit advanced the bilateral comprehensive strategic partnership and widened cooperation in areas such as semiconductors, digitalisation and skills. The visit came alongside Singapore’s push to expand digital and green economy agreements across Asia, positioning itself as a hub for new trade frameworks even as traditional globalisation slows. This diversification is part of a broader hedge against a more protectionist US and a less dependable China-centric trade environment.

. Outlook for the Markets . Manufacturing leads, demand lags

. Singapore’s GDP grew by an unexpectedly-sharp 6.9% YoY in Q4 (Oct-Dec), up from 4.6% the previous quarter, bringing full-year growth to 5%. Driving this acceleration was a sharp rebound in manufacturing, from 5.3% in Q3 to 18.8% in Q4. Overall, the manufacturing sector grew by 8.7% last year, up from 3.8% in 2024, supported by recovering semiconductor demand linked to AI and data centre investments. Services growth, by contrast, slowed to 4.3% in 2025, from 5.8% in 2024. Within services, information and communications along with wholesale trade showed the fastest growth at 6.1% each. In contrast to the rapid manufacturing surge, domestically-oriented indicators point to tepid demand. Overall, retail sales volumes grew by 2.4% in the fourth quarter of 2025 down from 3.5% in Q3. While private consumption grew by 3.9% in calendar 2025, total consumption expenditure rose by a slower 3.4% (down from 6.3% the previous year). Looking ahead, the Ministry of Trade and Industry (MTI) has pegged 2026 growth at 2-4%, a significant climb-down from last year.

. Easing inflationary pressures

Inflation perked up in the December quarter, touching 1.2% (up from 0.6% the previous quarter) but averaged 0.9% in 2025 ( down significantly from 2.4% in 2024). Crucially, inflation held steady at 1.2% in February. Importantly, too, much of the upward push last year was driven specifically by increases in healthcare (2.7%) and transport (2.5%) prices, whereas the previous year saw a broader increase across categories. In response to this ‘normalisation’ of prices, the Monetary Authority of Singapore (MAS) maintained its policy of a gradual appreciation of the S$NEER (Singapore Dollar Nominal Exchange Rate, a trade-weighted basket of currencies). The index strengthened in the upper half of the target band in late 2025, with the SGD trading at 1.28/$. The use of a trade-weighted index rather than a bilateral rate (such as the US$ alone) ensures that the currency's value is managed relative to all major trading partners, providing a more stable and accurate reflection of Singapore’s overall international competitiveness. This stance is designed to ensure medium-term price stability as both core and headline inflation are projected to stay in the 1%-2% range in 2026

. External momentum, sustained cost competitiveness

. Singapore's status as a global hub was reinforced by a surge in external demand, which expanded by 10.8%, nearly double the 5.7% growth seen in 2024, driving 2025 merchandise exports up by 9.6% from 5.7% in the previous year. In contrast, services exports expanded by 3.5%, a sharp deceleration from 13.2% in 2024. On the domestic front, overall labour productivity grew by 3.4% in 2025, which was crucial in offsetting a 3.5% rise in labour costs per worker. Because productivity surged by 5.1% in Q4, up from 2.5% in Q3, unit labour costs remained flat in 2025 after rising 1.3% in 2024, ensuring Singapore’s cost-competitiveness even as the economy accelerated. For 2025, net inflows of direct investment decreased to SGD 85 bn, from SGD 95.5 bn in 2024, due to increased outflows.

. Thailand . Politics and Policy . A fragmented parliament, an ongoing constitutional reform process

Thailand held general elections in February to elect its 500-member House of Representatives. Prime Minister Anutin Charnvirakul’s Bhumjaithai Party emerged as the largest bloc with 192 seats, followed by the People’s Party with 120 and Pheu Thai with 74. No party secured the 251 seats required for a majority, necessitating coalition talks to establish a government.

. Bhumjaithai has since reached a coalition agreement with Pheu Thai and several smaller parties, creating a governing bloc of ~290 seats. The newly-elected parliament formally convened on 14 March, marking the start of the legislative term and the process of confirming the next govement. The election was held alongside a referendum in which ~60% of voters approved the drafting a new constitution, signalling support for revisiting the current political framework.

. Governance credibility and anti-corruption pressures remain in focus

Institutional credibility continues to face scrutiny, with Thailand performing poorly in international governance indicators. In Transparency International’s 2024 Corruption Perceptions Index, it ranked 116th out of 180 countries. The government has responded by emphasising transparency and stronger anti-corruption enforcement as part of its investment narrative, particularly as it seeks to accelerate infrastructure approvals and attract greater foreign investment.

. Border tensions and regional security risks persist

Relations with Cambodia remain sensitive following clashes along disputed sections of the border, particularly around Preah Vihear. Although both governments maintain formal ceasefire arrangements and diplomatic engagement, the frontier has continued to see intermittent frictions. In parallel, the border has increasingly drawn attention as a centre for transnational crime networks, specifically large online fraud operations based in Cambodian border towns such as Poipet. These activities have prompted periodic enforcement operations and raised reputational concerns for Thailand’s tourism and services sectors, which remain central to the country’s economic recovery.

Thailand is also positioning itself as a facilitator for ASEAN discussions on Myanmar, advocating calibrated engagement with the country’s military authorities while pushing for reduced violence and greater humanitarian access. Given Thailand’s long border with Myanmar, developments there affect labour flows, cross border supply chains and security conditions in frontier provinces.

. Outlook for the Markets . Growth remains modest; policy shifts toward stabilisation

Thailand’s growth outlook remains subdued. Official estimates place 2025 GDP growth at 2.4%, with projections for 2026 ranging between 1.5% and 2.5%. (The IMF’s current estimate is 1.6%.) This wide gap reflects uncertainty around export demand, domestic investment and Thailand’s declining competitiveness in manufacturing supply chains.

Recent indicators show uneven momentum, and financial conditions remain constrained. Private credit growth slowed to ~1–2% YoY in late 2025 , reflecting cautious lending and high household debt, which remains above 90% of GDP . Policymakers have acknowledged that weak productivity growth and declining export competitiveness will continue to weigh on the pace of recovery without deeper structural reforms.

. Deflation and monetary easing define the macro policy mix

Thailand entered 2026 with headline inflation in negative territory. The headline CPI fell 0.9% YoY in February, marking the 11th consecutive month of negative inflation. This largely reflects tepid fuel prices, electricity-tariff adjustments and other government cost-of-living measures. However, core inflation remains in positive territory (~0.6% in February), indicating that the negative headline reading largely reflects energy price movements rather than a collapse in demand.

The Bank of Thailand eased monetary policy in February, cutting its benchmark policy rate by 25 basis points to 1%, following a split vote within the Monetary Policy Committee. The move reflects concerns about high household debt, alongside weak credit transmission and growth running below potential. Policymakers have also highlighted exchange-rate and capital-flow dynamics as the key factors shaping financial conditions. The Thai baht appreciated by 1.5% against the US dollar between October 2025 and mid-March 2026, impacting export competitiveness. At the same time, gold imports have heavily influenced the country’s BoP position, with Thailand importing about $9.6 bn worth of gold in 2025 compared with $7.3 bn the previous year.

. Exports and industrial policy anchor the near term outlook

External demand continues to support Thailand's economy, though the strong, 24.4% jump in exports recorded in January appears more cyclical than structural. Merchandise exports touched a record high of $31.6 bn, building on stronger-than-expected growth of 16.8% in December and 7.1% in November. The January surge was driven largely by electronics and integrated supply chains, particularly shipments of computers and electrical components tied to global AI and data centre demand.

Tourism remains a pillar of stability for the services sector. Tourist arrivals reached 32.9 million in 2025 , and the sector continues to anchor services activity . Monthly arrivals stood at 3 million in December and 3.3 million in January, generating monthly receipts of about THB 156.2 billion ($4.7 bn), according to the Bank of Thailand. The Tourism Authority of Thailand has set an official target of 36.7 million visitors in 2026 as the sector continues its post-pandemic recovery.

. At the same time, the government is attempting to strengthen long term growth drivers through targeted industrial policy. FastPass investment approvals and Board of Investment incentives have prioritised sectors such as data centres, clean energy and advanced manufacturing, while revised EV incentive schemes aim to position Thailand as a regional electric vehicle hub. These initiatives are intended to sustain foreign investment flows and deepen participation in high technology supply chains.

. Vietnam . Politics and Policy . Leadership consolidation strengthens policy continuity

The Communist Party’s 14th National Congress in January 2026 reaffirmed To Lam as General Secretary and set the policy direction for the 2026–30 period. The outcome signals a clear consolidation of power and a shift away from Vietnam’s earlier collective leadership model, strengthening policy continuity and decision-making speed while increasing reliance on top-level direction.

. Administrative restructuring signals scale of reform, but execution risks persist Ongoing administrative reforms are reshaping Vietnam’s governance architecture, with the number of provincial units reduced from 63 to 34 and communes consolidated from over 10,000 to roughly 3,300 under a streamlined two-tier system. Alongside efforts to strengthen economic governance and dispute resolution, the reforms aim to improve state efficiency and support higher-value growth. However, the scale of consolidation also raises execution risks, particularly at the local level, where administrative capacity remains uneven.

. US trade engagement expands, but frictions remain

Vietnam continues to deepen its economic engagement with the United States through a proposed reciprocal trade framework aimed at improving market access and supply chain integration. Under the current arrangement, Vietnam is expected to remove tariffs on most US goods, while the US is likely to retain a baseline tariff of around 20% on Vietnamese imports, significantly below the initially proposed 46% rate but still indicative of persistent trade imbalance concerns. Vietnam’s widening trade surplus with the US and scrutiny over Chinese-linked supply chains continue to create friction, with recent US investigations into excess manufacturing capacity across Asia reinforcing the risk of further trade measures. However, a recent ruling by the US Supreme Court deeming certain tariff actions unconstitutional introduces legal uncertainty around the use of unilateral tariffs, though it is unlikely to materially change the direction of negotiations or reduce near-term trade pressures.

. Strategic balancing shapes external positioning amid shifting global dynamics

Vietnam continues to pursue its ‘bamboo diplomacy’ approach, balancing closer economic engagement with the US and EU while maintaining strong trade ties with China, its largest partner. This strategy supports export-led growth and supply chain integration, but also leaves the economy exposed to external demand cycles and geopolitical tensions, making external conditions a key determinant of its growth trajectory.

. Outlook for the markets . Growth remains strong, led by manufacturing and services

Vietnam’s economy expanded by 8.5% year-on-year in Q4 (Oct-Dec), the fastest fourth-quarter growth in over a decade, bringing full-year 2025 growth to 8%. Industry and construction grew by 9.7% in Q4, while services expanded by 8.8%, driven by trade, tourism and transport. Manufacturing remained the main growth engine, reflecting Vietnam’s deep integration into global supply chains. Growth is expected to moderate in 2026, with the IMF projecting ~5.6% and the World Bank 6.1–6.3%. In contrast, the government has set a significantly more ambitious target of at least 10% growth, highlighting a wide gap between policy ambition and external expectations.

. Inflation remains contained, allowing policy flexibility

Inflation remains in control, with the CPI rising by an average of ~3.4% in Q4 and by 3.3% for the full year – well within the government’s target range. Core inflation also stood at 3.3%, indicating only limited underlying price pressures. This has allowed the State Bank of Vietnam to maintain a relatively accommodative stance, reflected in the absence of any rate tightening, continued guidance for high credit growth (17.7%) and ample liquidity provision to the banking system through open market operations. Inflation is expected to remain broadly contained in 2026, though risks remain from commodity prices and exchange rate pressures if global conditions tighten.

. Consumption strengthens, supported by a tourism recovery

Domestic demand improved steadily, with retail sales of goods and services rising 8.4% in Q4. The recovery was supported by rising incomes and a sharp rebound in tourism, with international arrivals increasing by 17.5% in the last quarter of the year. Transport and related services also expanded, reflecting stronger mobility and trade-linked activity. While exports remain the primary growth engine, improving consumption provides an important buffer, though momentum will remain linked to income growth and external conditions.

. Trade remains a key growth pillar, but external pressures persist

Vietnam’s external sector continued to perform strongly, with exports rising 20% to $ 126 bn in Q4, while imports grew 21.3%, reflecting robust demand for industrial inputs. The country maintained a trade surplus of ~$ 20 bn for the year, supported by manufacturing exports. Services exports also grew by 17.3% in Q4, led by tourism and transport. However, the economy remains highly exposed to global demand cycles and trade conditions, making the external environment a key determinant of growth in 2026.

. Investment and FDI remain strong, though external balances and currency pressures are emerging

Investment activity remained robust, with total disbursed investment rising 12.8% in Q4. Disbursed FDI reached $ 27.6 bn for the year, up 9%, and was the highest in five years, reflecting continued inflows into manufacturing and export-oriented sectors. This reinforces Vietnam’s position as a key supply chain hub, though more moderate growth in registered FDI suggests increasing investor caution. Vietnam’s external position remains strong, with the current account recording a surplus of ~$ 12.5 bn in Q3, supported by a large merchandise trade surplus and remittance inflows. However, the surplus is expected to narrow as import demand strengthens. The Vietnamese dong has remained relatively stable against the US dollar, supported by strong external balances, though it may face mild depreciation pressure if global financial conditions tighten.

. West Asia . Saudi Arabia . Politics and Policy . Iran conflict upends Saudi Arabia's diplomatic balancing act

Following the US-Israeli strikes on Iran, Saudi Arabia confirmed Iranian missile and drone attacks on Riyadh and its Eastern Province, including a strike on the Ras Tanura oil facility, forcing a temporary shutdown. Riyadh has responded by abandoning its post-2023 neutrality, formally designating Iran as an existential threat and reaffirming its right to retaliate.

. 2030 targets revised for pragmatism

Vision 2030, Saudi Arabia's flagship program to diversify its economy through large-scale infrastructure and tourism investment, is undergoing a visible strategic reset under Crown Prince Mohammed bin Salman (MBS). Prestige giga-projects are being scaled back, paused or restructured on economic-viability grounds; the focus is also shifting towards initiatives with clearer near-term returns. A new investment minister is tasked with overseeing the Public Investment Fund’s (PIF) reorientation toward logistics, mining, AI, logistics and advanced manufacturing. Significant capital is also being diverted away from overseas investments towards domestic priorities.

. US alignment deepens, but Iran war weighs heavy

Saudi Arabia is aligning with Washington’s push to de-risk critical mineral supply chains, positioning itself as a reliable supplier of non-oil minerals. According to a Saudi geological survey, the country has $2.5 tr worth of mineral reserves, including gold, zinc, copper and lithium, as well as rare earth deposits essential for defence, EVs, high-speed computing, etc. On the domestic modernisation front, female labour force participation has climbed to approximately 33%, ahead of a 30% target, and the unemployment rate among Saudi females touched a new low of 10.5% in early 2025. Saudi Arabia is scheduled to host the World Economic Forum’s Global Collaboration and Growth Meeting in Jeddah in April and will likely use it as a platform to restore shaken investor confidence.

. Outlook for the Markets . Non-oil growth advances but diversification remains distant

Saudi Arabia's economy grew by 4.4% in FY25, with non-oil GDP expanding by a faster 4.9%, reflecting genuine progress in the government’s diversification agenda. Oil and natural gas extraction accounted for the lion’s share of GDP (17%) but wholesale and retail trade, restaurants and hotels came second at 12%, followed by non-oil manufacturing (11%) and construction (8%). Notably, the trade and hospitality sector grew faster (6.2%) than any other, followed closely by financial, insurance and business services (6.1%). The 2026 budget targets 4.6% GDP growth, driven by non-oil activity, but a notable gap between oil revenues and spending commitments will require either deeper PIF drawdowns or a retrenchment of capital expenditure.

. Inflation contained; trade structure reflects an economy in active buildout

Consumer price inflation stood at 1.7% in February, mainly driven by a rise in housing, water, electricity, gas and other fuel prices. The 2026 budget has pencilled in a 2.3% rate, which may, however, be exceeded owing to the ongoing Iran conflict. Meanwhile, FDI net inflows rose 34.5% YoY in Q3, a sign of rising momentum, though at the current run rate, annual inflows currently amount to just about a third of the Kingdom's $100 bn annual target for 2030. 2024 saw gross inflows of $31.8 bn, while the total for Jan-Sep 2025 came to $21.5 bn, marginally higher than in the year-ago period ($21.3 bn). Conversely, outbound FDI fell by two-thirds (67%) YoY over the first nine months of 2025 – the result of the ongoing ‘rebalancing’ towards domestic investment. Overall, rising investment flows point to an economy in an active buildout phase, driven by sustained infrastructure and capacity expansion.

. Investment-driven imports; diversifying exports

Imports rose 2.4% in December, with machinery and electrical equipment accounting for 32% of the total. China remains the dominant source, at 29% of total merchandise imports, while Japan and China (~12% each) are the two top export destinations, followed by the UAE (11%). Saudi Arabia’s import profile is thus decidedly capital-goods heavy, with rising machinery volumes consistent with an economy in active buildout mode. Non-oil exports, including machinery, electrical equipment and parts, and chemicals, are also rising, up 7.4% YoY. The possibility of a prolonged conflict risks disrupting oil flows through the Strait of Hormuz, through which 37% of Saudi oil transits. However, the Red Sea port of Yanbu offers a partial buffer. Sustained tensions nonetheless risk weighing on investor sentiment and capital inflows, challenging the ability to deliver on the 2030 targets.

. United Arab Emirates . Politics and Policy . Iran strikes expose UAE’s vulnerabilities

Despite the limited physical damage thus far, direct Iranian strikes on the Emirates – which fly in the face of the UAE’s explicit non-alignment – have materially shifted the UAE’s risk profile, undermining its perceived neutrality and deterrence credibility. Iran’s targeting of US-linked infrastructure also reveals a willingness to disregard political signalling, increasing the likelihood of future spillover. For businesses, this elevates operational risk around critical logistics nodes such as Jebel Ali Port and key aviation corridors, while also challenging the UAE’s positioning as a stable, conflict-insulated hub for regional headquarters and capital deployment.

. Deepening alignment with the US on Gaza, AI and critical minerals

A UAE Minister of State was appointed to President Trump’s Gaza Executive Board, and the UAE continues to be the largest national donor of humanitarian aid to Gaza. Meanwhile, the UAE became the 9 th signatory to the Pax Silica Declaration in early 2026, strengthening its role in US-led critical minerals supply chains. The country is also rapidly scaling its AI infrastructure, including via a planned $30+ bn data centre expansion by Microsoft, reinforcing the UAE’s ambition to become a global ‘factory of intelligence.’ Meanwhile, the state-owned investment company Mubadala is backing G42 and MGX, advancing AI development through partnerships both domestically and internationally. For foreign firms, this deepening US–UAE tech alignment presents clear opportunities across AI infrastructure, data centres and critical minerals.

. UAE recalibrates regional relationships as Gulf tensions mount

The UAE is performing a strategic pivot to diversify partnerships amid rising tensions with Saudi Arabia. Frictions intensified after UAE-backed forces advanced in Yemen’s Hadramout and Mahra provinces in December, prompting Saudi air strikes and highlighting a widening divergence. While the UAE increasingly backs non-state and paramilitary actors across regional theatres, Saudi Arabia prioritises state-centric stability. Against this backdrop, the UAE is deepening external ties, including through a $200 bn investment pledge in and defence partnership with India, a $3 bn LNG agreement positioning India as its largest LNG customer, and progress towards an EU-UAE free trade agreement by end-2026, the first of its kind for the Gulf. Since 2022, the UAE has signed 30 trade agreements, underscoring a deliberate strategy to diversify economic and geopolitical alignment.

. Outlook for the Markets . Non-oil economy accelerates; growth broadens beyond Dubai

The UAE's non-oil economy continues to outpace other sectors, growing by 7% in the quarter ending September, compared to 6.8% for the economy as a whole. (Non-oil GDP is roughly 75% of the total, going by the latest numbers.) This reflects both, the maturity of the hydrocarbon sector and the genuine breadth of diversification underway. Growth has been broad-based across construction, real estate, logistics and technology, fuelled by domestic demand, rising tourist arrivals and expanding AI-related product demand. The 2026 budget aims to accelerate the Emirates’ long-term development, targeting a leadership position in technology and human capital and continued fiscal discipline. The IMF currently projects GDP growth at 5% this year and 4% in 2027. However, these figures are likely to be revised downwards if the Iran conflict lies unresolved for any significant period of time.

. FDI reaches record levels, underpinned by a deepening role as a global capital hub

FDI into the UAE doubled to a record $45 bn in 2025, with greenfield inflows up 78% YoY despite otherwise weak global flows, reinforcing its position as a leading destination for long-term capital. India was the top source of greenfield investment, contributing $12.6 bn across 275 projects. Leading the way is a proposed $10 bn smart manufacturing investment by Erisha E Mobility in Ras Al Khaimah. Outbound greenfield FDI also rose 51% (365 projects), resulting in net outflow of $76 bn. On the trade front, non-oil exports rose by 45%, reaching $220 bn last year. Trade with India increased by 14.7% underpinned by the Comprehensive Economic Partnership which contributed significantly to the non-oil trade.

. Iran conflict and Strait of Hormuz risk cloud an otherwise strong near-term outlook

The surge in oil prices from $70 to over $100 a barrel will bring temporary gains to the UAE as a major exporter. However, Iranian strikes have disrupted operations at major airports, impacting trade, tourism, logistics and real estate – the very sectors the UAE has spent a decade building. Equity markets have taken a severe hit, erasing over $120 bn in market capitalisation. Investors should monitor the duration of the conflict as the primary variable: an extended conflict would pressure not just UAE markets but GCC-wide equities, while a swift de-escalation supported by the UAE's $2 trillion sovereign wealth buffer and sustained multinational commitment would likely see a rapid recovery.

. Inflation – under control, for now

Inflation in the UAE remains broadly contained, with headline CPI inflation at 2% in December, well within the defined ‘comfort zone’. After touching a low of 0.55% in May, price pressures picked up modestly in the second half of the year, driven partly by housing-related costs, while food inflation stayed subdued at ~1%. The overall inflation trajectory remains consistent with the UAE's pattern of low, stable consumer prices. The CBUAE Base Rate currently stands at 3.65%, unchanged since December, when the central bank cut rates for the third time in the year in step with the US Fed. Inflation in 2026 is projected to average 1.8%, largely reflecting base effects from the low 2025 readings rather than any underlying price pressure. However, as with growth, a prolonged conflict would unbalance these figures.

. Comparative Indicators and Forecasts