Diverging Paths

East Asia . China . Politics and Policy . High-profile purges continue

In a 4-month span, 9 senior figures were removed from key party, military and legislative bodies in China. This includes 6 PLA generals stripped of their parliamentary seats; a sitting Politburo member expelled from the Communist Party of China (CPC) in July; and in September, the removal of the Central Military Commission's (CMC) Vice Chairman along with its Joint Staff Department Chief. These ‘purges’ seem to be the most intense stretch of President Xi's anti-corruption campaign since 2023. The Vice Chairman was the highest-ranking uniformed officer beneath the President and his fall means the 7-seat CMC now has only Mr Xi and one other Vice Chairman in active posts. The same Politburo meeting that approved the September removals set 26–29 October as the dates for the Fifth Plenum of the 20th Central Committee and confirmed that a document on strengthening Party self-governance will be submitted for deliberation. The timing, days ahead of President Xi's state visit to Washington and 5 weeks before the Plenum, suggests the leadership intends to project discipline in the upper echelons as succession issues come into sharper focus ahead of the 2027 Party Congress.

. Consumption gets its own 5-year plan

China released its first 5-year plan dedicated exclusively to consumption in July, an upgrade from earlier plans where consumption expansion was more of a supporting provision. The 2026-30 plan sets out 28 tasks across 6 areas: raising minimum wages and diversifying income channels; expanding social security to reduce precautionary saving; and steering spending toward services such as elderly care, childcare, tourism and health. The Ministry of Commerce followed with 19 complementary steps to professionalise the domestic services sector. A separate energy plan to increase the share of non-fossil sources to 25% of total energy consumption by 2030 was also announced. This ushers in much-needed change, especially as local governments tended to prioritise infrastructure spending over consumption, even as China’s low domestic consumption levels have kept growth heavily reliant on exports and investment instead.

. Uncertainty in the West…

Mr Xi's state visit to Washington, his first since 2015, saw President Trump personally greet him at Joint Base Andrews. This gesture had not been extended to any visiting world leader by a US president since the 1960s, and this break with tradition was viewed by some as a clear display of the priority the Trump administration is placing on Sino-US relations. However, this visit marked the third time the two men have met in under a year without a lasting agreement to show for it. The Busan trade truce was extended by 2 months, its shortest yet, and dubbed ‘transactional theatre’ by a Beijing-based analyst, timed around the US midterms rather being a step toward a lasting deal. The underlying rivalry over Taiwan, AI and China's dominance of rare-earth minerals remains unresolved and could unravel the truce at any point. Meanwhile, EU policymakers and think tanks have raised alarms over ‘China shock 2.0’, blaming Chinese overcapacity for its industrial decline and signalling possible new trade restrictions. Beijing insists the trade imbalance reflects Europe's structural weaknesses, including high energy costs and sluggish investment, rather than Chinese dumping. A fresh round of talks due in October will test whether the two sides can keep dialogue open or whether the rhetoric hardens into action.

. …Opportunities in the East

At the BRICS summit in New Delhi, Mr Xi proposed 5 ‘greater BRICS’ initiatives spanning AI, trade and investment facilitation, digital industry, manufacturing, and science and technology talent. He framed these around rallying the Global South amid what he called a ‘volatile’ international landscape. The summit was also Mr Xi's first visit to India in 7 years and he used the sidelines of the summit with PM Modi to commit to work toward a ‘fair, reasonable’ resolution of the boundary dispute. This continues a thaw in Indo-China relations that began earlier in 2026 with India's easing of Chinese investment restrictions and the reopening of business ties. Similarly, China deepened its Southeast Asia ties with the China-ASEAN Expo in September as well as the opening of the Pinglu Canal, which shortens shipping routes between southwest China and ASEAN markets. Beijing has also indicated its readiness to implement CAFTA 3.0, the upgraded China-ASEAN free trade pact.

. Outlook for the Markets . Growth slows in Q2 but August shows promise

China's GDP grew 4.3% YoY in Q2 (Apr-Jun), down from 5% in Q1, the weakest quarterly expansion since late 2022. QoQ growth eased to 0.9% from 1.3% while H1 growth came in at 4.7%. The National Bureau of Statistics (NBS) attributed the slowdown to ‘short-term factors and external influences’, but soft domestic demand, subdued private investment and prolonged property downturn are the more likely causes. Industrial data for August points to some recovery in Q3: output grew 5.2%, up from 4.5% in July, though still below June's 5.3%. High-tech manufacturing grew 16.7% (July: 16.9%) and equipment manufacturing 12.1% (July: 12.3%), both roughly flat if not slightly slower after outpacing overall output all year. Consumer prices rose 0.8% in August, up from a 6-month low of 0.5% in July, while producer prices rose 3.8%, up from 3.5%, the first sustained run of positive PPI readings in years. Full-year growth is currently forecast by the OECD and the World Bank to fall in the 4.4-4.5% range.

. Widening surplus, lagging credit and consumption

August marked a fourth straight month with a trade surplus above $100 bn. Total trade grew 19.8%, up from July's 19.2%, exports rose 18.6% (July: 17.8%) and imports 21.7% (July: 21.2%). Retail sales growth continued to decelerate, from 1% in June to 0.6% in July and 0.4% YoY in August; cumulative Jan-Aug growth was 1.1%. Exports are carrying growth almost single-handedly while domestic demand continues to weaken. Credit growth slowed to 4.9% YoY in July, the lowest on record, after new loans contracted by ~$50 bn in the same month, the sharpest single-month drop ever recorded. Households reduced their overall debt holdings, the first net deleveraging since 2002, a sign of growing pessimism, with consumers prioritising repayment over spending despite low borrowing costs. This pessimism is also reflected in a contraction in fixed-asset investment: corporate loans fell by RMB 130 bn (~$19 bn) in July after rising RMB 1.5 tn (~$220 bn) in June, then recovered only partially in August, up RMB 260 bn (~$38 bn). Cumulative new lending across all borrowers for the first 7 months of 2026 totalled RMB 10.4 tn (~$1.5 tn), down almost 20% from RMB 12.9 tn (~$1.9 tn) over the same period in 2025.

. The renminbi firms as fiscal support fades

China's current account surplus rose to $195 bn in Q2, up from $184 bn in Q1. The renminbi's nominal effective exchange rate rose 3.8% between January and May, while the real effective rate rose by a smaller 1.6% over the same stretch, held back by low domestic inflation (0.5-1%). Public spending grew by just 1.2% over Jan-Aug, while revenues grew 5.7%. Most of the spending growth can be attributed to central government expenditure, which rose 6% against local governments’ 0.3%. Falling land lease revenues, a major source of local government income, likely contributed to them spending only around half their planned budgets through July. On current trends, if local governments do not increase expenditure to offset weak private demand, they will only reinforce the slowdown.

5-year yuan treasury bond futures debuted in Hong Kong in August as part of a push to internationalise the currency, and foreign holdings of onshore Chinese bonds reached RMB 3.2 tn (~$474 bn). Beyond adding to the yuan’s global credibility, this could serve as a lifeboat for the domestic economy, if proceeds from further overseas issuance get channelled into funding local government debt swaps and central investment, easing pressure on local finances.

. Hong Kong . Politics and Policy . Hong Kong’s first five-year plan unveiled

Alongside his annual policy address, Chief Executive John Lee in mid-September unveiled Hong Kong’s first Five-Year Plan. The plan sets out 22 performance targets in total: 5 binding and 17 aspirational. 4 of the 5 binding targets are environmental, including a commitment to add more construction-ready sites by 2030. The centrepiece is the Northern Metropolis, a major development project that aims to eventually house around a third of Hong Kong’s population, create 650,000 jobs and deliver 70,000 new homes over the next 5 years. It includes efforts to develop new sources of growth, expand AI adoption and address Hong Kong’s declining birth rate. Separately, Mr Lee confirmed that the crucial Election Committee Subsector elections will take place on 22 November, ahead of the Chief Executive and District Council elections in 2027.

. Fresh US tariff on HK goods

The US imposed an additional 12.5% tariff on Hong Kong-origin goods on 24 July, citing alleged forced labour in supply chains. The measure, imposed on a total of 60 countries/trading partners adds to existing reciprocal tariffs.

. Harsh sentencing in Tiananmen vigil case

A Hong Kong court sentenced 3 former leaders of the disbanded Hong Kong Alliance, including barrister Chow Hang-tung and unionist Lee Cheuk-yan, to 5–7 years in prison for incitement to subversion under the national security law. The Alliance had organised Hong Kong’s annual Tiananmen vigil since 1990, until authorities banned the event in 2020 and the group disbanded the following year. The court said the group’s calls to ‘end one-party dictatorship’, continued promotion of the vigil after the ban, and refusal to provide information sought by police about its alleged foreign ties constituted unlawful incitement. The UK and EU criticised the ruling as undermining confidence in the rule of law.

. Outlook for the Markets . H1 growth hits a five-year high while HKMA follows a surprise Fed rate hike

Hong Kong’s economy maintained strong momentum in the first half of the year, with GDP expanding 4.3% in Q2 (Apr-Jun) and 5.1% in H1 as a whole, the strongest first-half growth in nearly 5 years. Inflation remained contained despite the robust expansion, with headline CPI easing to 1.7% in July from 2% in June. The monetary-policy backdrop, however, turned more challenging. After oil prices rose above $100/barrel, the US Fed raised its policy rate by 25 bps to 3.75%-4% on 16 September and signalled that further tightening could follow. The Hong Kong Monetary Authority (HKMA) responded the following day with a 25 bp increase in its base rate, to 4.25%, its first hike since July 2023. Local banks left prime lending rates unchanged for now, although HKMA Chief Executive Eddie Yue warned that a widening rate differential could put downward pressure on the Hong Kong dollar and push it toward the weak side of its convertibility band.

. AI-driven exports and resilient consumption power growth, more mainland stimulus expected

Private consumption grew 2.8%, marking its fifth consecutive quarterly increase, supported by strengthening mainland tourist spending and an active IPO market. Analysts expect further fiscal stimulus from the mainland later this year to help sustain the momentum. External demand was also strong. Goods exports surged 43% YoY in the January-August period, driven by robust global demand for AI-related electronics, with growth accelerating further in August (53% YoY). IN comparison, services exports rose just 3.4% YoY in Q2. Although Hong Kong is not a chip manufacturer, it re-exports more than 70% of the electronic products passing through the city, reinforcing its role as a key logistics hub in the AI supply chain. Stronger imports, however, widened the goods trade deficit. The current account surplus still grew, to $12.3 bn in Q2 from $11.9 bn a year earlier. A wider goods deficit ($7.5 bn, up from $4.9 bn) was more than offset by rising primary income ($15.8 bn versus $13.6 bn) and a bigger services surplus ($4.9 bn versus $3.9 bn).

. Hang Seng loses its 2026 gains

The Hang Seng Index declined roughly 3% YTD, to ~25,000 levels and by ~5.7% on a YoY basis as of 21 September. This reverses gains made earlier in the year, when a Stock Connect-driven IPO boom pushed the index higher. Mainland buying into Hong Kong stocks has stayed net positive, though it has slowed from H1’s peak months, when monthly inflows topped $12.8 bn. Sentiment has also taken a hit from online apparel retailer Shein’s weak (~-10%) Hong Kong debut on 1 September, and from rising tensions in the Middle East. The property market bucked this trend, with prime office rents and luxury home prices recovering in Q2. (Luxury prices, for instance, were up 10% from their March 2025 trough, according to a Rating and Valuation Department report.)

. Japan . Politics and Policy . LDP retakes Okinawa, clearing a path for Ms Takaichi’s security agenda

An election in a remote prefecture handed PM Sanae Takaichi her biggest strategic win of the year. On 13 September, LDP-backed newcomer Genta Koja unseated two-term Governor Denny Tamaki with 59% of the vote, the LDP’s first win in Okinawa in 12 years. Okinawa hosts the bulk of the US military presence in Japan and sits close to Taiwan, and its governor holds veto power over the local land approvals needed to continue operating the US’ Futenma air base. Mr Tamaki, an opponent of the US presence, had withheld these approvals for years. Ms Takaichi had personally campaigned hard for Mr Koja, who is seen as far more accommodating. September also saw the PM’s first Cabinet reshuffle, which kept her senior team largely in place while giving her coalition partner, the Japan Innovation Party, its first-ever Cabinet seat. With the LDP’s September 2027 leadership race already in sight, her main aim was to ensure continued stability.

. Washington ties deepen despite persisting tariff friction

Under a 2025 trade agreement with America, Japan has committed to investing up to $550 bn in US strategic sectors through 2029. The largest tranche (up to $332 bn) targets nuclear and power infrastructure via firms like Westinghouse, GE Vernova and Hitachi. This includes $40 bn in a small-modular-reactor project in Tennessee and Alabama. Meanwhile, consolidating the bilateral defence-industrial ties, Washington and Tokyo agreed in March to quadruple SM-3 Block IIA missile production in Japan, from ~24 to 100 units a year, and to deploy the US Typhon missile system on Japanese soil. Still, frictions persist: Section 232 tariffs on Japanese steel and autos remain in place, and a Section 301 forced-labour investigation added a further tariff of up to 12.5% on Japanese goods in July.

. Ties with Beijing stay frozen while Tokyo builds security architecture and deepens hedges with India and Australia

Relations with China have been strained in the aftermath of Taiwan-related comments made by Ms Takaichi last November. She told parliament that a Chinese attack on Taiwan could be ‘survival-threatening’ for Japan and could prompt a response from its Self-Defence Forces. The shift also gets reflected in the 2026 Diplomatic Bluebook, which describes China as an ‘important neighbour’, a notable change from 2025’s reference to China as ‘one of the most important bilateral relations’. The foreign minister emphasised that Tokyo will continue to pursue a ‘strategic and mutually beneficial relationship’. Japan is also strengthening its security capabilities. In July, it launched the National Intelligence Bureau, its first centralised intelligence body since WWII, with plans for a dedicated foreign intelligence agency by 2028. The FY26 defence budget reached a record ¥9.04tn($58.1 bn), with Tokyo looking to build capacity to respond to a Taiwan contingency. Japan is also expanding its list of foreign security partnerships. A July summit with India deepened cooperation on AI, semiconductors and critical minerals, supporting broader economic security ties. Meanwhile, Mitsubishi Heavy Industries’ participation in Australia’s next-generation Mogami-class frigate project marks a more direct expansion of Japan’s defence role abroad.

. Outlook for the Markets . BOJ raises rates to a 31-year high on stronger-than-expected growth

Japan’s economy is holding up better than expected, giving the Bank of Japan room to tighten policy. GDP grew by 0.9% YoY in Apr-Jun, up from an initial estimate of 0.7%. The revision mainly reflects a smaller-than-projected (0.9%, compared to an initial 1.2% estimate) fall in capital spending. Private consumption, meanwhile, was flat. At the same time, inflation, while firm, remains manageable. Core CPI, excluding fresh food, rose 1.7% YoY in August, staying below the BOJ’s target 2% for the 8 th consecutive month below the BOJ’s 2% target. Rising wages present a stronger case for tightening. Led by the 2026 Shunto (spring) wage settlement, set at 5.26%, real wages rose 2.4% in July, extending their gains to a 7 th consecutive month, the longest run since 2021. In light of this, the BOJ raised its policy rate by 25bp, to 1.25% on 18 September. Factoring in the government’s expansionary monetary policy, the bank believes that inflation is likely to remain ‘clearly above 2%’ through the second half of FY26.

. Business sentiment holds up amid the Hormuz oil shock, with semiconductor demand lifting manufacturers

Japan, which imports most of its energy, remains highly vulnerable to swings in energy prices. Still, despite the Hormuz closure and the resulting spike in oil and gas prices, business sentiment held up through Q1 FY26 (Apr-Jun). The monthly Reuters Tankan survey showed business confidence improving further into August. Manufacturers’ sentiment rose to +18 from +13 in July, its highest level since March. Strong semiconductor demand and a boost to exports from a weaker yen appear to have more than offset pressures from higher energy import costs. Machinery makers, in particular, reported a sharp increase in semiconductor-related orders, with precision-machinery orders running at twice normal levels since April, both in Japan and overseas. Confidence also improved among non-manufacturers, rising to +28 from +25. Retailers and service providers continued to report steady consumer demand.

. A food-tax cut advances despite record bond yields, testing Ms Takaichi’s fiscal balancing act

The Cabinet approved a tax reform package cutting the consumption tax on food and beverages from 8% to 1% for 2 years from April 2027, fulfilling a key campaign pledge. It still needs to clear an extraordinary Diet session, expected in October. The pledge has proved contentious: the 10-year JGB yield hit three-decade highs this quarter, as investors weighed Japan’s public debt – already about twice the size of its economy. US Treasury Secretary Scott Bessent also criticised the policy as ‘big stimulus.’ Ms Takaichi has tried to reassure markets by retaining her fiscally conservative finance minister, who negotiated a joint US-Japan yen intervention with Mr Bessent in July. She also kept a reflationist ally as economy minister, signalling she still intends to pursue her spending commitments.

. A steadier yen underpins Japan’s current account even as a tourism slump deepens

The yen, which fell to near 160/$ this spring, has recovered to around 155/$ as this month’s rate hike further narrows the interest rate gap with the US. Japan’s external position also remains resilient. The current account surplus widened to ¥3 tn ($18.5) bn in July, taking the first-half surplus to ¥17.4 tn ($110.0 bn). The goods balance, however, slipped into a ¥400 bn ($2.5 bn) deficit as higher energy prices and a weaker yen pushed up import costs. Once again, primary income, which captures earnings repatriated from Japan’s overseas investments, did much of the heavy lifting. It rose 5.8% to ¥4.3 tn ($26.5 bn), more than cushioning the trade shortfall. Tourism revenue, though, has slowed. Foreign arrivals fell 9.6% in August to 3.1 mn, with visitors from mainland China down 59%, to 418,000. The decline has continued since Beijing discouraged travel to Japan following Ms Takaichi’s remarks on Taiwan.

. South Korea . Politics and Policy . President Lee runs into trouble over appointments

In June, President Lee Jae Myung’s Democratic Party won 12 of 16 mayoral and gubernatorial seats, though Seoul re-elected its conservative mayor, Oh Se-hoon. Just 3 months later, in early September, two of Mr Lee’s ministerial nominees were forced to withdraw over allegations of impropriety. Gallup’s latest (mid-September) Korea poll put Mr Lee’s approval at 37%, the lowest since he assumed office, with public dissatisfaction over his cabinet nominees and housing being cited as the key reasons. Seoul apartment prices have been rising relentlessly, and week on week, for close to 2 years while mortgage restrictions have made purchases harder for first-time buyers. To ease the pressure, Mr Lee intends to build apartments on part of a land earmarked for the city’s expansive Yongsan Park. However, Mr Oh wants the whole site preserved as public green space and is unwilling to cede even a ‘single centimetre’.

. Trump shortens joint drills without warning Seoul

In August, Donald Trump ordered a substantial reduction in military drills and cut short the Ulchi Freedom Shield, an annual joint military exercise, without consulting Seoul. He cited his ‘very good relationship’ with North Korean leader Kim Jong Un and Seoul’s refusal to join the war against Iran as justifications for the move. Alarmingly, he went as far as to say that large-scale drills send a signal that is ‘totally inappropriate and hostile’ to Pyongyang. This unilateral move could have long-term repercussions for regional security, and may accelerate South Korea’s development of indigenous nuclear submarines.

Starting to make good on a $350 bn pledge

Last year, South Korea promised to invest $350 bn in the US under a trade agreement that ‘reduces’ US tariffs on Korean goods to 15%. In September, it chose a gas-fired power plant in Texas as the first project under that pledge. The planned 6.3 GW plant, valued at more than $20 bn, would supply electricity to data centres and chip factories. President Lee has stipulated that individual projects must earn a commercial return on investment and Korean lawmakers have questioned whether the Texas plant will do so. While the selection of the plant is a crucial step towards materialising the investment, the proposed ownership terms are subject to further negotiation with Washington.

A former technology chief takes office

In July, Han Seong-sook became only the second woman to serve as South Korea’s prime minister. A former chief executive of Naver (often described as the ‘Google of Korea’), Ms Han identified AI adoption as a key priority in her inaugural address. Indeed, the government’s planned ‘AI for All’ programme would offer citizens free access, without usage limits, to a chatbot built largely on Korean AI models. Three consortiums, led by SK Telecom, Kakao and KT will deliver these services through phone and text messages, an AI chatbot and advanced search functionalities, eliminating the need for app installations. The state will provide the consortia with 512 Nvidia B200 processors this year and intends to subsidise nationwide service costs from 2027. Its preference for Korean AI models opens a market for domestic developers. Kakao also plans to set up a marketplace through which smaller firms can offer specialised assistants.

. Outlook for Markets . The chip boom lifts growth, but unevenly

South Korea’s economy grew by 0.6% in Q2 (Apr-Jun) QoQ and 3.7% YoY. Strong demand and higher prices for memory chips used in AI systems prompted the Bank of Korea to raise its 2026 growth forecast to 3.3% from 2.6% as the semiconductor boom and its spillover effects more than offset ongoing uncertainties around the Middle East situation. Exports rose 1.3% QoQ, led by semiconductors, machinery and equipment. Manufacturing grew 1.4% as production of computer, electronic and optical goods increased; investment in facilities edged up 0.2%.

Inflation holds above target and rates are hiked twice

After eight consecutive pauses, the Bank of Korea raised its base rate from 2.5% to 2.75% in July, then to 3% in August as inflation reasserted itself on the back of increased energy, commodity prices and supply constraints stemming from the Middle East conflict. Consumer prices rose 3.1% in August, well above the Bank’s target of 2%, while prices excluding food and energy rose 3.4%, indicating a significant second round inflationary effect. Stronger chip-led growth is adding to demand while imported energy has kept costs high. The Bank of Korea currently project annual CPI inflation at 2.7% as cost pressures continue to pass through and demand-side pressures gradually increase.

. Chip exports surge while car shipments fall

Korea exported $98 bn of goods in August, marking a 69% YoY jump. Chips accounted for ~$47 bn, or close to half the total; the wider information and communications technology category accounted for 61%. Automobile exports, on the contrary, fell 30%, partly because of production disruptions. The headline export numbers thus reflect exceptional, and possibly short-lived, demand for a particular group of products rather than broad-based demand. On the budgetary front, the government has proposed a total outlay of $597 bn for 2027, up 12.8% over 2026 and the largest annual increase on record. (The science ministry has proposed raising spends on AI transformation from $3.7 bn to $6.8 bn.) Large, anticipated tax receipts from semiconductor companies will help support the plan, which awaits parliamentary approval.

External earnings reach another near-record high

South Korea recorded a $42 bn current account surplus in July, its second-highest monthly figure ever (after June’s ~$50 bn), and marking 39 consecutive months in surplus. (The previous such streak, 83 months long, ran through March 2019.) Strong chip earnings have helped Korea absorb a rising bill for imported energy.

Record chip profits fail to spare the stock market

Samsung Electronics and SK Hynix now account for nearly half the weight of the KOSPI, South Korea’s main stock index. While their steep rise helped carry the market upwards, their falls have had a similar effect. After peaking in late June, Samsung and SK Hynix shares plunged in July end before regaining ground. From their July lows, both shares have gained ~40% while the KOSPI, led by them, has gained 27%.

The won recovers while reserves increase

FII sales of Korean shares and a then-strengthening US dollar pushed the Korean won down to the mid 1,500s in June, from the mid 1,400s in early May. However, the two rate hikes, together with record monthly current account surpluses, have helped it recover to ~1,357/$. The Bank attributed the recovery partly to a moderation in share sales by foreigners and the dollar’s recent reversal. Foreign exchange reserves rose by $14.3 bn in August, their largest monthly increase on record, to $442 bn.

New fuel-price controls

Korea’s heavy dependence on imported energy requires it to continuously monitor and prepare for exigencies. In September, the government announced a tenth round of price ceilings for petroleum products, applicable for another 4 weeks, after reviewing global oil prices and their burden on households. The controls provide relief at the gas station, while imported fuel continues to add to business costs and inflation.

. Taiwan . Politics and Policy . Defence spending rises, but the argument over what to buy continues

Lawmakers finally passed Taiwan’s $93 bn 2026 budget in August, after a record 266 days of political deadlock and long past its legal deadline. The delay reflected serious differences over defence spending. Specifically, the opposition parties – which hold a parliamentary majority – rejected President Lai Ching-te’s view that Taiwan should both , build weapons at home and buy some from the US (to reduce supply-chain risks). In early September, the Cabinet proposed a supplementary defence budget of $4.6 bn to procure drones and anti-ballistic missiles, months after the opposition whittled down a special defence proposal from $40 bn to $25 bn, restricting the approved funds largely to US-made arms. Still, policymakers on both sides of the aisle remains aligned on ramping up and modernising the defence sector, with the government currently proposing a record $35 bn (+18%) budget for next year.

An American arms package remains in limbo

Even as Washington has repeatedly encouraged Taipei to increase defence spending and improve military readiness, a $14 bn package, authorised by Congress months ago, has been kept in abeyance by Donald Trump. After meeting President Xi in May, Mr Trump said he was holding it back as a ‘very good negotiating chip’ against China (which resolutely opposes US arms sales to Taiwan). During their recent bilateral meeting, Mr Xi again urged Mr Trump to oppose Taiwanese independence. However, there is growing domestic pressure – including from several Republican Senators – to release the stalled security package, given that the delay brings into question America’s commitment to Taiwan's defence and its broader deterrence strategy in the Indo-Pacific.

Powering Taiwan's semiconductor expansion

As Taiwan’s chipmakers expand capacity to meet rising demand driven by AI, electricity consumption continues to rise strongly. (Rising temperatures, which have caused a spike in air-conditioner usage, is another key contributing factor.) The energy ministry expects demand to grow by an average of 2.5% a year from 2026 to 2035, up from a previous forecast of 1.7% and more than double the 1.2% average growth recorded over the past decade. In September it proposed a new offshore wind plan, with the aim of raising installed capacity to ~19 GW by 2035 from current levels of 4.9 GW. It also plans to add 26 GW of new thermal generating capacity by 2035, mostly through new natural gas fired units. At the September groundbreaking of a new chip packaging park in Kaohsiung, President Lai said that the government had assessed demand through 2035 and expects to maintain a stable supply.

Lai promises a share of the AI windfall

Taiwan's surge in chip and computer exports has given the government greater room to spend. His proposed 2027 budget sets aside about $7.4 bn for ‘AI dividend’ payouts of roughly $315 per person, grounded in the belief that ordinary citizens should benefit from Taiwan’s tech-driven growth. The proposal also includes ~$1.3 bn for 10 AI-related projects and plans for more support for small firms to obtain computing capacity and invest in new equipment.

. Outlook for Markets . Taiwan’s economy grew by 12.9% in Q2 (Apr-Jun), following a 15.4% rise in Q1. Manufacturing output grew by 18.3% and exports of goods and services rose by 21.2%. The national statistics agency expects the economy to grow by 11% in 2026, up from its May forecast of 9.6%. If realised, it would be Taiwan’s biggest annual expansion in nearly 40 years. The agency expects exports of goods and services to rise by 21% and private investment in fixed assets by 11.6% this year, as chipmakers and their suppliers add capacity. The latest estimates put GDP per person at $45,332 in 2026, up from $39,515 last year.

Rates held steady as inflation eases

Taiwan’s consumer prices rose by 2% in August, easing from 2.5% in July. In its September meeting, the central bank kept its policy rate intact at 2%, where it has been since March 2024. The bank expects inflation to average 2.1% in 2026, slightly above its earlier forecast, as higher oil prices and persistent increases in service prices temper the relief from August’s reading. For now, strong export growth and inflation holding close to the 2% mark has given the bank enough room to hold rates steady.

Reserves recover as the NT dollar strengthens

Taiwan’s foreign exchange reserves crossed the $600 bn mark at the end of August, accruing $7.6 bn that month. The central bank attributed the increase to returns on its reserves, movements in other currencies against the USD and its own efforts to smooth volatile capital flows. The New Taiwan dollar is currently at 31.7/$ levels, up marginally from ~32.3/$ at the end of July.

TSMC’s weight magnifies the stock market’s swings

Taiwan’s stock market has shown both the positive and negative sides of its excessive dependence on the Taiwan Semiconductor Manufacturing Company (TSMC). In mid-July, TSMC’s shares fell by 7.3% after the chipmaker forecast lower profit margins for the following quarter; the TAIEX plunged by 6.5% that day, its largest fall on record in index points. By late September, the index had fully recovered, even setting a new record. Worryingly, though, TSMC continues to account for over 40% of the market’s value, so any news about this one company plays an outsized part in determining the returns for investors across the broader stock market.

. Southeast Asia & Oceania . Australia . Politics and Policy . Government faces pressure over living costs and migration

Dissatisfaction over living costs and the property tax changes announced in May—including restrictions on rental-loss deductions and changes to capital gains taxation—has weakened support for PM Albanese's Labor Party government. September’s Newspoll put One Nation first on 30%, ahead of Labor on 27% and the opposition Liberal-National Coalition on 19%. Opposition leader Angus Taylor has ruled out a future governing alliance with One Nation, despite its growing popularity. Migration has become a source of political pressure, with opposition parties demanding deeper cuts to ease housing demand. The government has announced tighter visa rules but opposes deeper reductions, arguing that these would restrict the supply of workers needed to build homes and deliver healthcare and other essential services.

Tax reforms favour new housing and support business investment

Housing affordability concerns have prompted new tax concessions for property investors. Legislation passed in June restricts negative gearing to new homes from July 2027, while protecting investments held before the Budget announcement. By allowing investors in new homes to deduct rental losses from their other taxable income, the government aims to encourage purchases that support housing construction rather than investment in existing properties. The legislation also changes how capital gains are taxed, retaining preferential treatment for eligible new builds. Parliament passed the second-tax reform bill in August, restoring a loss carry-back provision that expired after FY23, allowing eligible companies to recover some previously paid tax when they incur losses. It also makes the small-business instant asset write-off permanent. These provisions should support business cash flows during loss-making periods and provide greater certainty when planning equipment purchases.

Government tightens migration rules and sets conditions for data centre investment

Visa rule-changes announced in September will restrict dependants on most student visas, introduce ballots for second- and third-year working holiday visas and limit visitors’ ability to extend their stay. Priority processing for healthcare, construction and other key sectors seeks to preserve access to skills while reducing overall arrivals. Separately, the National Cabinet, comprising federal, state and territory leaders, agreed in August to develop mandatory national standards covering large data centres’ energy and water use, location and associated skills commitments. The proposed requirements include underwriting additional power supply, paying their share of grid-connection costs and minimising water use, with legislation planned for early 2027. AI security concerns gained urgency in September following disclosure that an OpenAI agent had accessed non-public files on a Medicare statistics portal. A review led by the Department of the Prime Minister and Cabinet will examine safeguards and incident-reporting arrangements, with its findings informing the AI standards.

US tariffs strain trade ties as Australia strengthens other partnerships

Higher US tariffs have added friction to Australia’s relationship with Washington, even as defence cooperation continues. The tariff on covered Australian goods rose from 10% to 12.5% in July, although key exports including beef and gold remain exempt. Canberra continues to seek relief, and the US is reportedly ‘considering’ the request. Simultaneously, Australia has deepened its other partnerships, strengthening cooperation with India on defence, critical minerals and technology and with Vietnam on supply chains and maritime security. At a meeting on the sidelines of the UN General Assembly on 21 September, Mr Albanese and EU leaders reaffirmed their intention to sign the Australia–EU free trade agreement negotiated in March, aimed at reducing trade barriers and improving access to each other’s markets, though no date was set.

Pacific security concerns reinforce closer ties with neighbouring countries

Competition with China for influence in the Pacific continues to shape Australia’s regional diplomacy. In July, Australia signed a mutual defence alliance with Fiji alongside the Vuvale Union, a treaty deepening economic and security cooperation, backed by more than AU$ 1 bn in spending over a decade. The Pukpuk Treaty with Papua New Guinea also entered into force, strengthening Australia’s network of regional defence partnerships. Despite receiving advance notice, Canberra condemned China’s Pacific ballistic missile test as destabilising, underscoring tensions over Beijing’s military activity.

. Outlook for the Markets (Financial Year: July 1st – June 30th)

. Growth remains subdued as domestic demand loses momentum

Australia’s GDP grew 0.4% QoQ in the June-ending quarter, marginally above the previous quarter’s 0.3%, while YoY growth slowed to 2.1% from 2.5%. The expansion was supported by household consumption, government spending and net exports but other parts of the economy grew less evenly.

Higher spending on public services partly offset weaker public investment, while business investment declined as data-centre spending eased from the previous quarter’s highs. Data centres and renewable infrastructure nevertheless remain important sources of investment, though a dependence on imported equipment limits their contribution to domestic output. Looking ahead, earlier interest rate increases and weaker housing conditions are expected to constrain demand. The RBA’s August forecasts project annual growth slowing to 1.4% by December 2026.

Underlying inflation keeps further rate increases in view

Headline inflation eased to 3.5% YoY in July, from 3.8% in June, but remained above the RBA’s 2–3% target band. Trimmed mean inflation, which excludes extreme price movements, was unchanged at 3.6% YoY, indicating persistent underlying pressures. Housing and food remained major contributors. On a monthly basis, overall consumer prices rose 0.6% during July on a seasonally adjusted basis. The RBA held the cash rate at 4.35% in August, following three increases earlier in the year, as it assessed the impact of tighter policy. However, in September, Governor Michele Bullock warned that renewed oil price increases and the global AI investment boom were adding to inflation risks. Further tightening therefore remains possible despite slowing economic growth.

Vehicle purchases support consumption, but broader demand remains cautious

Household consumption grew 0.4% QoQ and 1.8% YoY in the June quarter, with discretionary spending supported by strong electric and hybrid vehicle purchases. Vehicle purchases jumped 10.3% QoQ in the June-ending quarter after staying negative for the two previous quarters. Other discretionary categories remained subdued, while domestic and international tourism weakened as the Middle East conflict disrupted travel. Essential spending, covering necessities such as food, housing, utilities and healthcare, fell 0.3% QoQ, as milder weather reduced household energy use and consumers cut fuel consumption. The household saving ratio edged up to 6.5% in the June-ending quarter, from a revised 6.4% in March. Weak consumer sentiment and falling housing prices remain constraints on a sustained recovery in demand.

. Fuel and vehicle imports deepen the trade deficit

Australia’s combined goods and services trade deficit widened to AU$ 5.1 bn in the June quarter, from a revised AU$ 2.9 bn in March. Imports rose 4.0% QoQ, outpacing the 2.8% increase in exports. Higher petroleum prices and additional diesel shipments lifted the fuel import bill, while electric and plug-in hybrid vehicle imports reached record levels. Export earnings benefited from stronger demand for energy commodities, including thermal coal as overseas buyers sought alternatives to disrupted LNG supplies. However, the increase in import prices pushed the terms of trade (measuring the relative prices of a country's exports to imports) down 1.6%. Despite the wider deficit in value terms, net trade volumes made a small positive contribution to GDP growth, highlighting the role of higher import costs in the deterioration.

Current account deficit widens despite an improvement in external liabilities

Australia’s current account deficit widened to AU$ 27.2 bn in the June quarter, from a revised AU$ 25.4 bn in March, driven by the larger trade deficit. The primary income deficit remained broadly unchanged (at AU$ 21.9 bn), continuing to account for most of the external shortfall. Meanwhile, the capital and financial account surplus narrowed to AU$ 5.3 bn (from AU$ 16.6 bn in the previous quarter). Australia’s net international investment liability position declined (to AU$ 638.9 bn), supported by higher valuations of its overseas equity holdings as global stock markets recovered. This improvement reflected asset valuation gains, while the widening current account deficit pointed to continued pressure on external earnings. The Australian dollar came under renewed pressure in September after appreciating more than 5% against the US dollar between end-June and early September. The currency fell to a seven-week low of around $0.70 per AU$, weighed down by a stronger US dollar, rising US Treasury yields and investor caution over energy prices and inflation.

. Indonesia . Politics and Policy . Non-alignment hardens into strategy

Jakarta and Beijing launched their first Comprehensive Strategic Dialogue in August, agreeing on a 2027–31 roadmap spanning trade, energy, minerals and maritime cooperation. However, President Prabowo reaffirmed Indonesia’s broader ‘non-aligned’ stance at the Eastern Economic Forum in September and additionally, led Indonesia's delegation to the BRICS summit in Delhi in September as a full member. A training exercise was conducted with China as well, drawing sharp criticism from Taiwan. Later that month, Super Garuda Shield 2026, the annual US-Indonesia defence exercise was executed with Australia, Japan, Canada, Singapore and South Korea also taking part. It helps that Indonesia is the world's dominant nickel supplier, a position neither Washington nor Beijing can ignore, and one Jakarta is leveraging to stay on the fence rather than strongly committing to either.

. DSI's mandate narrows to monitoring

Four months ago, Indonesia created a new agency, DSI, requiring every coal, palm oil, and ferroalloy export to be routed through it rather than sold directly. Initial fears were that Jakarta had nationalised the process, and DSI's own numbers (some 6,500 export declarations worth over $14bn, tracked in its first two months of active monitoring) seemed to confirm this. The government has since clarified that DSI is, for now, monitoring rather than replacing commercial exporters, though the regulation itself gives DSI direct authority to set export prices. Industry seems to have taken this in its stride: Harita Nickel, the country's largest processor, says its ferronickel exports through DSI are running smoothly, and the miners' association has separately backed a related state pricing exchange to escape being a price taker on its own nickel.

. Flagship programmes outrun their own delivery

The free nutritious meals programme (President Prabowo's flagship scheme providing free daily meals to millions of students and mothers) had its full-year 2026 budget cut for the second time this year, down to $12.8 bn in July from ~$15 bn two months earlier and from the $18.4 bn original budget. The driving forces, this time, were an internal programme evaluation and a narrower-than-expected beneficiary count. In September, authorities suspended nearly 2,000 kitchens for failing sanitation registration, around the same time that 60 parents came forward with a police complaint over an August poisoning outbreak in North Sumatra.

Adjacently, an International Financial Centres law passed by parliament in July, which is intended to draw global banks and family offices with tax holidays and a specialised legal jurisdiction, is already before the Constitutional Court, which held a preliminary hearing on a petition challenging the plan for a special court within that framework.

. Outlook for the Markets . BI's succession lands without a stumble

In late July, Bank Indonesia (BI) Governor Perry Warjiyo resigned 2 years ahead of the end of his term, citing personal reasons; S&P said the move added ‘policy uncertainty’ even as it affirmed Indonesia's BBB rating. (The rupiah and Indonesian equities fell only modestly in response.) Parliament later approved Destry Damayanti as Mr Warjiyo’s successor, and she was sworn in as the first woman to lead the central bank. Her appointment came weeks after Law No 4/2026 took effect, which broadens BI's mandate to include growth and gives parliament binding influence over its decisions, a change that makes Ms Destry's early rhetoric on ‘government coordination’ worth watching. The rupiah has since firmed by about 2.1% from the day of Mr Warjiyo's resignation, to Rp17,611/ $ in mid-September. BI held its policy rate steady at 5.75% through both the July and August meetings.

. External deficit widens as inflows slow

Indonesia’s current account deficit reached $12.5 bn (3.3% of GDP) in Apr-Jun, up sharply from $3.6 bn (1% of GDP) in Jan-Mar. A wider oil and gas deficit, higher energy imports and higher primary-income outflows drove the deterioration; July trade data offered no relief, with imports up 27% YoY to $26.1 bn against export growth of just 6.1% (to $26.2 bn), leaving a cumulative $18.8 bn oil and gas deficit for Jan-Jul against a ~$22.5 bn non-oil and gas surplus. Foreign portfolio inflows, which reached roughly $8 bn in the second quarter (after BI raised rates and expanded swap incentives), slowed to ~$1.7 bn in the third quarter (through early September). Investors kept buying government bonds, but sold central bank securities (SRBI) at a similar pace, leaving net inflows almost flat.

. Growth beats forecasts; its composition still worries

GDP grew 5.3% in Apr–Jun, faster than the 5.1% consensus though below the government's 5.4% target, and down from 5.6% in Jan–Mar. Government consumption grew 16% YoY, on the back of 21.8% growth in January–March. With public spending growing at a rate far exceeding any other component of GDP, it is clear that much of Indonesia’s headline growth is being propped up by public outlays rather than private demand. At the same time, the manufacturing PMI had a less than steady journey: a contraction to 46.9 in June, a rebound to a five-month high of 50.2 in July, and a slip back to 49.8 in August, with export orders down for a 5 th straight month. Bank credit grew 13.6% YoY in July, with a capital-adequacy ratio of 23.7% in June and gross NPLs of 2.1%, both close to their recent norms.

. Fiscal slippage brings quasi-fiscal tools into play

The finance ministry revised its full-year 2026 deficit outlook to roughly $41 bn (2.9% of GDP) in early July, above the enacted 2.7% target, citing an extra ~$7.4 bn in energy subsidies as the main driver. Both projected revenue (~$180 bn) and spending (~$221 bn) are currently running above their original targets. Cuts to the free meals programme freed some room, and the ministry has also drawn on its own balance sheet rather than seeking new borrowing. It extended a further $11.2 bn of existing government cash (previously parked at BI) into deposits at state-owned banks through July 2027. (Separately, BI has eased bank reserve requirements, freeing up roughly $25 bn for banks to lend in a liquidity push.) The revised deficit outlook is projected to stay within the statutory 3% ceiling, but only after cutting a flagship programme and leaning on the ministry's own cash reserves rather than ordinary budget adjustments.

Headline CPI inflation climbed back to 3.2% in August after easing to 2.9% in July from 3.3% in June, bringing it close to BI's currently mandated 3.5% ceiling. A further breach would matter on both sides of the fiscal/monetary line, as it would likely force BI to tighten even as the ministry is trying to keep credit cheap. Higher rates would also raise the government's debt-servicing costs.

. Singapore . Politics and Policy . Singapore targets population management

As part of its 61 st National Day Celebration in August, Singaporean PM Lawrence Wong highlighted 4 key areas the country will address in order to adapt to global developments. The first is ‘strengthening families’, with policy measures that include more generous childcare leaves for working parents, financial incentives worth around SG$70,000 for each child and enhanced access to affordable education and housing. Another is ‘staying open and connected’ which includes economic openness in the face of global protectionism, as well as immigration policies that attract skilled foreign talent while ensuring citizens remain the majority and maintain multicultural social cohesion. These can be seen as direct responses to Singapore’s declining total fertility rate, with direct cash benefits to encourage childbirth and efforts to sustain the population through migration.

Expanding horizons, with caution

The third focus area is ‘embracing technology’ while managing associated risks. As part of this, the country announced a complete ban on social-media platforms for users under 13 and safety measures, monitoring for users between 13-18 years of age. Under the same technological umbrella, workers whose jobs are affected by change will be provided with support and retraining to ensure a smooth transition. Lastly, the administration is working towards a ‘future ready Singapore’ by reclaiming land on its outer islands and connecting it to the mainland to create new spaces for housing and industry.

Viewed holistically, these policy announcements display foresight in tackling emerging issues, but their effectiveness can only be judged by time. Additionally, measures like the social media ban face resistance from MNC big-tech firms and will do nothing to help Singapore’s global reputation as a ‘nanny state’.

All eyes on ASEAN

External engagement is increasingly being organised around ASEAN as Singapore prepares to assume the bloc's chairmanship in 2027. At the September ASEAN Economic Ministers' meeting, members advanced regional economic integration and external partnerships, while Singapore and Thailand agreed to coordinate their successive chairmanships in 2027 and 2028. The country has also been deepening bilateral links with Indonesia and India. At the annual India-Singapore ministerial meeting in early September, the parties pledged cooperation on regional supply chains, semiconductors and digital payments. Diversification is particularly crucial today, given that the island-nation was one of 60 countries targeted by US Section 301 investigations, which imposed a 12.5% tariff and exposes around one-third of its exports to the US. Singapore has continued negotiations with Washington for an exemption, while noting that the immediate economic impact has so far been limited.

. Outlook for the Markets . AI boom lifts growth outlook as domestic spending lags

Singapore's GDP grew 5.9% in Q2 (Apr–Jun) 2026, above the 5.7% advance estimate but easing from 6.3% in Q1, while QoQ growth picked up to 1.4% from 1.2%. Following strong first-half growth of 6.1%, the Ministry of Trade and Industry (MTI) raised its 2026 forecast in August to 4.5–5.5% from 2–4%, citing a stronger-than-expected global AI investment boom. Manufacturing grew 12.5% YoY after slowing to 7.3% in Q1 2026 (down from 11% in Q4 2025), led by electronics and precision engineering. The purchasing managers' index (PMI) extended its expansion to a 13 th consecutive month, reaching 51.5 in August, its highest since November 2018.

Non-oil domestic exports (NODX) rose 46% YoY in August, extending the 24% rise in July. Electronics shipments to the US grew more than 3-fold in both months, suggesting AI demand rather than front-loading ahead of the July tariffs, whose effects have been limited by exemptions for semiconductors and certain electronics. However, some economists note that the AI upturn only accelerated in late 2025 and Enterprise Singapore figures confirm that NODX in August 2025 was at its lowest monthly level, providing a low base for August's impressive export growth which will likely moderate in the second half of 2026. Domestic demand, though, remains tepid, with retail growth at 1% in Q2 (from 2.5% in Q1) and food and beverage services contracting 1.5%, which MTI partly attributes to more outbound travel by locals and fewer visitor arrivals. In July, retail sales growth slowed to 1.5% YoY, from 4% in June, but this was against a much higher base: last July, the government distributed ‘60 th anniversary vouchers’ worth SG$600-800 to all citizens which drove strong spending on supermarkets, food and alcohol.

. MAS tightens as AI risk is stress-tested

MTI says dampened consumer sentiment amid inflationary pressures could weigh on retail and F&B sales in the second half of the year, with government-issued cost-of-living vouchers and a one-time payout worth SG$ 400-600 cushioning the impact. Core inflation rose to 2.2% in August from 2.0% in July, while electricity and gas inflation reached 8.7% in July from a 2.9% decline in June, and held there in August, after the regulated household electricity rate was raised 17% for July–Sep to reflect the spike in global gas prices since April. The Monetary Authority of Singapore (MAS) raised the slope of the Singapore dollar nominal effective exchange rate (S$NEER) policy band very slightly in July, following a slight increase in April, and economists expect further tightening in October.

MAS and MTI both maintained their 2026 inflation forecasts at 1.5–2.5%. While AI optimism is deservedly high in Singapore, MTI listed a sudden risk-off over AI-related capital spending among its key downside risks. Meanwhile, MAS's recent Financial Stability Review highlighted financial market stress, including AI-driven fragilities, as a key risk area, ranked third by impact behind geopolitical risk and cyber and operational risks.

MAS recently stress-tested listed firms with revenue shocks of up to 30% and interest rate shocks of up to 400 bps, in addition to a solvency test modelling an AI-led downturn for systemically important banks. It concluded that most firms would weather the shocks and that banks would stay above their capital requirements, with 32% of listed firms at risk. Singapore has so far absorbed the energy price shock and with buffers that hold in MAS's stress scenarios it appears resilient enough to ride out even a worsening of global conditions over the short-to-medium term, though the most leveraged firms and energy-intensive industries would feel it first.

. Thailand . Politics and Policy . The budget passes, but the ceiling keeps coming down

Three months after a backlash over its ~$5 bn farm debt subsidy package raised doubts about the durability of the ruling coalition, PM Anutin Charnvirakul's government passed the first budget of its renewed mandate. The House cleared the ~$113.1 bn FY2027 budget on 1 July with 288 votes to 119, and the Senate followed in September, with the coalition holding together. The Constitutional Court had already removed a separate legal risk on 9 July, rejecting an opposition challenge to the government's use of emergency authority and upholding the ~$12 bn borrowing decree that funds extra-budgetary spending on a consumer co-payment scheme and a green energy package. A planned deficit of ~$23.5 bn puts public debt at a projected 69.4% of GDP by the end of FY2027, close to the 70% ceiling set under the 2018 Fiscal Responsibility Act. That leaves little room to raise further emergency borrowing without either breaching the ceiling or amending it.

Data centres move from a selling point to a permitting problem

Thailand's data centre policy committee met in early September and asked operators to pause 166 projects, 49 already under construction and 117 still waiting on permits, while it writes national rules on power, water, siting and safety. The review followed a complaint about a data centre built next to a hospital, which exposed the fact that some facilities had been getting planning permission as warehouses rather than going through proper zoning and safety reviews. Upon examination, officials found just 35 facilities actually operating and only 11 with Board of Investment backing, against a much larger pipeline moving through separate approval tracks with electricity utilities, water authorities and local planners, who had never compared notes. Four subcommittees have a month to write the new criteria, including a proposed threshold that would reclassify centres using more than 2MW as industrial operations, thus triggering factory licencing and environmental impact assessments not currently needed by data centres. The pause should lift by early October, though it remains voluntary, and the government has no legal power to halt a site that has already secured permits. Future approvals will weigh job creation, technology transfer and clean energy use, and water and power will be priced to cover their actual cost.

Cambodia goes to arbitration, Myanmar gets a warmer welcome

Thailand's border dispute with Cambodia continues to run on two separate tracks. On land, both countries have kept troops deployed since deadly border clashes in 2025, and Thailand completed the first section of a permanent fence along the frontier in July. Separately, after revoking a 25-year-old bilateral memorandum, Thailand and Cambodia opened a five-member conciliation panel under the UN Convention on the Law of the Sea (UNCLOS) in mid-September over their contested maritime boundary, an area with potential offshore hydrocarbon reserves. The process is non-binding and covers only the maritime claim, leaving the land dispute untouched. Relations with Myanmar moved in an entirely different direction: contact escalated from a foreign-minister courtesy call in mid-July to a full presidential visit weeks later, when Bangkok hosted President Min Aung Hlaing for talks on a $12 bn bilateral trade target and the Dawei economic zone. Thailand's outreach breaks with the informal norm most ASEAN members have held since 2021, when the bloc restricted the junta's participation pending progress on its still-unimplemented five-point peace plan.

. Outlook for the Markets . Growth beats the forecast, but on a narrow base

GDP grew 1.9% in Q2 (Apr-Jun), against a Reuters median forecast of 1.7%, but contracted 0.2% QoQ after seasonal adjustments (a smaller contraction than the 0.6% predicted in the same Reuters poll). First-half growth came to 2.4%, prompting the government to raise its full-year forecast to 2-2.5%. The ASEAN+3 Macroeconomic Research Office (AMRO) has sharply raised its own forecast, to 2.4% in September, from 1.9%. Private investment grew 13.4% and exports by 17.6%, while public investment fell 1.6% and private consumption rose just 1.9%. Imports grew faster still, up 42.3%, contributing to a $17.7 bn current account deficit for the quarter. The gap illustrates Thailand's investment boom, aligning with its substantial capital-equipment imports for the data-centre and AI buildout.

. Exports outrun the tariff; tourism still lags

Exports grew 17.6% in Q2 (Apr-Jun), matching their Q1 pace, with electronics the biggest driver. Electronics exports grew 59.5% in Q2, slightly faster than in Q1 (57.3%). In July, outbound shipments picked up pace, rising ~22% YoY, with US-bound shipments jumping by 45%. The Ministry of Commerce has said this surge partly reflects exporters front-loading shipments ahead of tariff deadlines, most recently a new 12.5% tariff that took effect on 24 July. While electronics are exempt from the new tariff, they remain exposed to a separate, unresolved US review of the semiconductor trade, so this exemption may prove temporary.

. July's tourist arrivals reached 2.5 mn, generating ~$3.4bn in receipts. Arrivals were essentially flat against July 2025's 2.6 mn, but the cumulative Jan -Aug total of 18.5 mn arrivals was 3.2% below that in the same period in 2025. In response, Tourism Authority of Thailand (TAT) launched a micro-regional strategy in August targeting China specifically, and now expects Chinese arrivals to exceed 5 mn in 2026, though this is lower than TAT’s earlier, 6.7 mn target.

Thailand's current account swung into a $17.7 bn deficit in Q2, equivalent to 12% of GDP, a sharp reversal from the modest $1.4 bn surplus (0.9% of GDP) recorded in Q1. Driving this was a surge in capital-equipment imports to enable Thailand’s data centre and AI-investment buildout. Meanwhile, the Thai baht has depreciated from 31/$ levels in January to 33.3/$ in late September. Foreign reserves have fallen mildly, from ~$294 bn in early 2026 to ~$283 bn at the end of August.

. Investment pipeline swells

Board of Investment applications reached ~$44 bn in the first half of the year, up 37%YoY, with digital and data-centre projects accounting for ~$33.4bn of the total. Realised capital expenditure over the same six months came to ~$15.8 bn, roughly half of it AI-linked.

Inflation stays target; credit offtake remains two speed

After spiking to 2.9% in April (following a surge in oil prices), headline inflation eased to 1.95% in July but perked up to 2.5% in August, remaining within the Bank of Thailand's 1-3% target band. The central bank held its policy rate at 1% in its August meeting. In response to rising energy prices, Thailand's energy regulator, the ERC, cut the nationwide residential electricity tariff to 3.86 baht per unit for the Sep-Dec period, down from 3.95 baht in the prior period, with the three state utilities (MEA, PEA and EGAT) applying the new rate. Household debt eased slightly, to 85.9% of GDP at end-March from 86.7% at end-December.

Access to credit has been uneven, though: SME lending contracted 4% YoY in Q1, a 15 th straight quarterly decline, while lending to large companies grew 2.7% over the same period. With policy rates already near historic lows, Thailand faces a potential NPA problem: SME bad loans sit at 9.2%, over three times the system-wide rate, and banks are rejecting 60-70% of SME applications while funnelling credit to larger borrowers with solid repayment records. SME sales have plateaued and customers have been making delayed payments, leading banks to tighten underwriting to protect asset quality. The result is a self-reinforcing cycle, where weaker business fundamentals raise default risk, which makes banks even more selective, which then starves the same firms of the financing that might help them recover.

. Vietnam . Politics and Policy . Governance reforms seek to strengthen policy execution

The Communist Party adopted Resolution 19-NQ/TW in July against a backdrop of persistent delays in investment projects. A review reported by the Party’s Central Commission for Inspection identified continuing obstacles involving land allocation, investor selection, planning adjustments and the implementation of inspection conclusions, tying up land and capital. The resolution places greater weight on results in personnel assessments, assigns clearer responsibility to agency heads and calls for protecting officials taking initiative in the public interest. It also seeks greater delegation of powers to local authorities, intending to improve the functioning of the two-tier government system. The measures signal an attempt to tackle bureaucratic inertia and accelerate policy execution, while preserving firm Party control.

Technology and energy policies support domestic capabilities

In July, Vietnam introduced regulations governing offshore-wind development, specifying which organisations can survey potential sites and setting financing requirements, including a minimum 20% equity contribution for covered projects. In August, the government announced an environmental action programme prioritising pollution control, wastewater treatment and stronger implementation of manufacturers’ and importers’ recycling responsibilities. It subsequently approved a National AI Strategy, targeting a top-three position in Southeast Asian AI research and development by 2030 through investment in computing infrastructure, workforce training and support for smaller businesses adopting AI. Together, these measures signal a push to strengthen domestic technological capabilities and support cleaner growth, with investment opportunities in digital and environmental infrastructure alongside closer scrutiny of industrial compliance.

US tariff pressure persists as negotiations progress

In late July, the US imposed a 12.5% tariff on Vietnamese goods following a Section 301 investigation into restrictions on imports produced using ‘forced labour’. The duties replaced the expiring temporary 10% global tariff, with Vietnam’s assigned rate covering approximately 37% of its exports to the US after exemptions. Negotiations continue, with the Vietnamese government reporting that talks were approaching a final agreement following President To Lam’s meeting with US Trade Representative Jamieson Greer in late September. Although this signals progress towards easing bilateral tensions, uncertainty over the eventual settlement continues to weigh on Vietnam’s export outlook.

Bamboo diplomacy strengthens technology and energy partnerships

To Lam visited Australia in August and Russia and France in September, advancing Vietnam’s efforts to broaden its technology and energy partnerships. Discussions with Australia focused on science, technology and innovation, while the Russia and France visits strengthened energy and research ties, including cooperation with Russia on the planned Ninh Thuan 1 nuclear project. Prime Minister Le Minh Hung also attended the BRICS Summit in India in September, where he proposed bilateral free-trade negotiations and closer technology and transport links. These engagements underline the economic priorities behind Vietnam’s ‘bamboo diplomacy’, as Hanoi seeks investment and technological expertise from a wider range of partners while managing continued trade tensions with Washington.

. Outlook for the markets . Industrial activity remains strong, but growth risks are building

Vietnam remains one of Asia’s fastest-growing economies, with GDP up by 8.4% in the June-ending quarter, taking first-half (Jan-Jun) growth to 8.2%, up from the 7.6% recorded in the same period last year. Growth was supported by industry and construction growing at 10.5%, alongside continued expansion in services at 7.9%. The country’s strong manufacturing momentum has continued into Q3, with the index of industrial production rising by 14.4% YoY in Aug and 11.9% over Jan-Aug, the strongest 8-month stretch recorded in several years. However, Vietnam’s growing dependence on imported energy and industrial inputs, together with trade tensions with the US, are key downside risks. The World Bank projects full-year growth of 6.8% (implying a much slower second half), well below the government’s target of ‘at least 10%’. Achieving the official target would require H2 growth in the range of 11.6-12%, which appears highly unlikely in the face of mounting external risks.

Vietnam achieved an important landmark in July, transiting into an upper-middle-income economy under the World Bank’s classification system, with its GNI per capita touching $4,970 in 2025.

Inflation rises again as fuel prices surge

Headline CPI inflation rose to 4.9% in August, from 4.5% in July, moving above the government’s 4.5% full year inflation target. This was largely because domestic fuel prices were adjusted in line with global energy costs. Transport prices rose by 4.1% over the month and accounted for ~40% of the overall monthly increase. Core inflation stood at 4.6%, indicating that price pressures are becoming broad-based. Average CPI inflation over Jan-Aug was 4. 5%, while core inflation averaged 4.2%.

In August, the Prime Minister instructed the State Bank of Vietnam to maintain policy rates and urged commercial banks to lower lending rates by reducing operating costs. The aim is to ease borrowing costs without cutting policy rates, but persistent inflation could limit banks’ ability to carry this out in practice.

Consumption remains resilient, supported by tourism

Retail sales of goods and consumer services increased by 14% in the June-ending quarter. Over Jan-Aug, sales rose by 13%, reflecting continued expansion in consumption demand and service activities, and driving overall service-sector growth. Tourism provided additional support, with international arrivals totalling 15.9 mn in the first 8 months of the year, 14% higher than a year earlier. However, rising prices may begin to weigh on household purchasing power and thus consumption growth.

. Trade deficit widens as imports outpace exports

Vietnam’s goods trade deficit widened to approximately $13 bn in the June-ending quarter, with exports rising by 23% but imports growing by a much faster 39%. For the Jan-Aug period as a whole, exports rose 22% and imports by 35%, taking the cumulative trade deficit to $20.5 bn, compared with a surplus of $14 bn in the same period last year. Rising imports partly reflect stronger demand for production inputs amid a recovery in manufacturing,. Capital goods accounted for 94% of total imports during Jan-Aug, indicating continued manufacturing and investment activity. However, the widening deficit has weakened Vietnam’s overall BoP position.

FDI remains strong, led by manufacturing

Registered foreign investment—covering new projects, additional capital for existing projects, and foreign investors’ capital contributions and share purchases—reached $40.6 bn over Jan-Aug, up 55% YoY. Disbursed FDI, representing capital actually invested, rose by 12% to $17.3 bn, the highest 8-month figure in 5 years. Manufacturing remained the principal recipient, attracting 56% of newly-registered capital and accounting for 83% of disbursed FDI.

. West Asia . Saudi Arabia . Politics and Policy . Economic portfolios combined as diversification drive intensifies

Saudi Arabia consolidated its energy, industrial and mining portfolios in July, bringing them under the common leadership of its Energy Minister, Prince Abdulaziz bin Salman, who now oversees all three sectors the Kingdom regards as pillars of its economy. The aim is to ensure better coordination and faster decision-making across these related sectors, while driving economic diversification under the Vision 2030 plan. Mining has become an increasingly important component of the diversification programme, and it is estimated that the Kingdom possesses approximately SAR9.4 tn ($2.5 tn) in mineral resources.

A landmark nuclear agreement with America

In July, Saudi Arabia and the United States signed a civil nuclear cooperation agreement, known as the 123 Agreement, which currently remains subject to congressional review. The deal would enable the transfer of US nuclear technology and expertise to the Kingdom and is a key part of Riyadh’s efforts to diversify its energy mix and reduce its dependence on hydrocarbons. However, the deal has since raised fresh concerns in Washington as it preserves a pathway for the Saudis to enrich uranium domestically. Unlike with the equivalent US-UAE agreement, it does not require the Kingdom to either renounce domestic uranium enrichment or adopt the IAEA’s full Additional Protocol, which permits extensive inspections of a country’s nuclear activities. The documents does clarify that any enrichment programme would remain subject to US approval and oversight. Even so, concerns persist because Saudi leaders have indicated that they would pursue nuclear weapons if Iran obtained them first, potentially undermining the current global non-proliferation regime and further destabilising an already volatile region. The deal’s prospects have dimmed further after

President Trump announced that they would not proceed unless Saudi Arabia joins the Abraham Accords and normalises relations with Israel, a step Riyadh has so far resisted.

Mecca pact broadens security partnerships

Saudi Arabia, Türkiye and Pakistan signed the Mecca Joint Defence Agreement in August, which, like NATO’s Article 5, treats an armed attack against any one of them as an attack against all three. The pact builds on Saudi’s existing defence relationship with Pakistan and Türkiye and reflects Riyadh’s effort to broaden its security partnerships amid growing concerns over the reliability of existing security guarantors, principally the US. However, the precise scope of the agreement remains unclear, particularly whether Pakistan and Türkiye would be expected to respond to the recent attacks from the Houthis, as the deal remains in its early stage. Pakistan has described the agreement as ‘defensive’ and not one that is directed against either India or Iran. The pact could eventually expand to other regional states with Egypt, Qatar, Kuwait as potential candidates.

Houthi escalation threatens Saudi oil exports

In mid-September, the Yemen-based Houthis launched an attack on Riyadh as well as energy sites on the country’s Red Sea coast. The relative calm between the Houthis and Saudi Arabia began to unravel in July when the former announced a naval blockade and began attacks on southern parts of Saudi Arabia. Of particular concern is the attack on the East-West Pipeline around Yanbu, which had allowed it to transport crude bypassing the Strait of Hormuz. While the pipeline was being repaired, Saudi Aramco rerouted some cargo through alternative channels and suspended October allocations to some of its customers. Continued disruption to both the Strait of Hormuz and Saudi Arabia’s Red Sea export infrastructure would place a larger share of Gulf supplies at risk and raise freight, insurance and crude costs in the near term.

. Outlook for the Markets . Oil shock pushes the economy into contraction

Saudi Arabia’s GDP contracted by 4.7% in the second quarter of 2026 (Apr-Jun), down from a 3% expansion in Q1. The decline was driven almost entirely by oil-related activities, which fell by ~25% YoY, subtracting 5.4 pp from headline growth. This underscored again Saudi Arabia’s continued heavy reliance on oil, despite its attempts at economic diversification. Non-oil and government activities both expanded by a sluggish 0.9%, suggesting that the effects of the Iran conflict are extending well beyond the energy sector.

Domestic demand loses momentum

Consumption growth also slowed markedly in Q2, with government final consumption expenditure growing by 5%, compared with 11.3% in Q1, while private consumption increased by just 0.8%, compared to 5.3% in Q1. Gross fixed capital formation expanded by 2.7% year-on-year but declined by 1.4% on a quarterly basis. Among individual sectors, financial and business services grew by 3.3%, while community, social and personal services expanded by 4.1%. Wholesale and retail trade, restaurants and hotels, however, contracted by 2%, indicating pressure on the more outward/consumption-facing parts of the economy.

Inflation remains contained

Retail (CPI) inflation stood at 1.8% in both July and August, driven by rising prices of housing, water, electricity, gas and other fuels. This was in line with Saudi Arabia’s largely stable, medium-term inflation trajectory, with CPI inflation hovering mainly in the 1.7-2.5% band, underpinned by the riyal’s peg to the dollar as well as prudent management by the Saudi Arabian Monetary Authority (SAMA). Housing is currently the single largest contributor to rising prices, adding 0.8 percentage points in August, for instance.

Oil drives a widening trade surplus

Saudi Arabia’s merchandise trade surplus reached SAR63 bn ($16.8 bn) in Q2, up 62% YoY as exports increased and imports declined. However, monthly data points to weakening momentum as merchandise exports fell by 4.5% in June from (+) 9.3% in April and (+)3.9% in May. The quarterly improvement was concentrated in oil which rose by ~10% on account of rising prices; non-oil exports, including re-exports, fell by 8%. China remains Saudi Arabia’s largest trading partner, accounting for about one-eighth of exports and a quarter of imports.

. FDI normalises after Q4 spike

Gross FDI inflows rose marginally (2.4% YoY) to SAR26.6bn ($7.1bn) in Q1 while dropping ~50% QoQ from Q4 2025's SAR53.1bn ($14 bn). Rather than indicating some drop-off in investor sentiment, the steep QoQ decline likely reflects the fact that FDI can be lumpy, and a few large deals drove the ‘outperformance’ in Q4. Meanwhile, outward FDI jumped 50% in Q1, to $933 mn, with the Public Investment Fund (PIF), the Kingdom’s sovereign wealth fund, deploying capital overseas in an ongoing diversification move. Annualised, the Q1 FDI figures would imply ~$28 bn of inflows this year, well short of Vision 2030's $100 bn annual target.

. United Arab Emirates . Politics and Policy . Iranian attacks expose UAE’s vulnerability

Renewed Iranian attacks in August brought the conflict back to the fore for the UAE. Less than a week after two ADNOC (Abu Dhabi National Oil Company)-affiliated vessels were attacked in the Strait of Hormuz on 13 August, the UAE detected two Iranian ballistic missiles targeting maritime traffic. Iran denied responsibility for the missiles but Abu Dhabi suspended all trade, commercial exchanges and financial transactions with Iran until further notice. In late August, Tehran conducted ‘retaliatory drone attacks’ against the US forces at UAE’s Al Minhad air base, an important logistics and air transport hub. The UAE also said that it had intercepted an Iranian drone over its territorial waters but denied that the base itself had been attacked. Despite conflicting accounts from both parties, the episode highlights UAE’s exposed position and further damages its reputation as the region’s secure business hub.

BRICS provides a channel for de-escalation

Despite these provocations, the UAE continues to engage with Tehran through other channels. The September BRICS summit in New Delhi marked the highest-level engagement between the countries since the conflict began. Both sides endorsed a joint declaration calling for restraint, respect for sovereignty and protection of trade, energy flows and maritime security. While the declaration may not ultimately alter the course of the war, it highlights UAE’s willingness to engage via alternative means.

UAE builds new routes around Hormuz

The UAE has responded to disruption in the Strait of Hormuz through a combination of emergency workarounds and longer-term infrastructure investment. ADNOC implemented a shuttle system wherein tankers carry cargo through the Strait before transferring it to long-haul vessels in safer waters. This system is being used to maintain supplies of LNG and crude oil, particularly to key importers like India. By mid-September, regional ship-to-ship oil transfers had reached approximately 2.5 mn barrels a day, though this process has sharply increased transport costs for suppliers. The UAE is also ramping up its investment in new pipelines and ports and is introducing measures such as spot tenders and delivery at alternative transfer points. These steps seem to indicate that the country is accepting higher near-term costs to reduce its dependence on a single maritime chokepoint.

Security concerns reshape AI ambitions

Following attacks on the Gulf’s cloud and AI infrastructure, the UAE is reconsidering the design of its planned 5-GW AI data-centre project with the United States. Originally intended as a single 26 sq-km campus in Abu Dhabi, the project will now be dispersed across a network of multiple smaller data centres across the country, with underground or blast-resistant construction and additional air-defence protection. Since the project remains central to the UAE’s ambition to establish itself as a global AI hub, it is now being embedded with greater security measures for operational resilience.

Broadening strategic partnerships

In addition to strengthening critical infrastructure at home, the UAE is looking outward to build a broader network of strategic partners. Of particular significance is UAE’s growing energy ties with Germany, building on a longstanding trade relationship. Following the UAE President’s visit to Berlin in early September, the government pledged to invest $46 bn in Germany and announced 29 commercial agreements worth more than $11 bn, covering energy, AI, data centres, industry, aviation, security and defence. The two countries also launched a Strategic Dialogue and Investment Council to institutionalise cooperation, alongside agreements covering LNG supplies, offshore wind and security. The partnership allows UAE a better access to European markets and enables Abu Dhabi to reduce its dependency on any single partner while pursuing greater strategic autonomy.

. Outlook for the Markets . Non-oil activity cushions the Q1 slowdown

GDP growth slowed to 3% in the first quarter of 2026 (Jan-Mar), down from 8.5% in the previous quarter, led by a 3.5% contraction in mining and quarrying. Non-oil output (~80% of the total) was comparatively resilient, growing by 4.8% and led by the financial and insurance sectors (which accounted for ~2.4 pp of non-oil GDP growth, growing by 17% YoY). In effect, with the government focused on economic diversification, non-oil activities drove most of the growth in Q1. However, given that the Iran conflict began only in late February, these figures do not fully reflect its impact on the economy, which will become evident in data for subsequent quarters.

Volume or value?

According to the Government of Dubai Media Office, the UAE’s non-oil foreign trade reached $527 bn in the first half of 2026, up 13%. Non-oil exports grew even faster, rising by 24% to a record $123 bn, and increasing their share of non-oil trade from 21% to 23%. Trade with fully implemented CEPA partners accounted for 16% of the total non-oil trade. China remained the UAE’s largest non-oil trading partner, followed by Switzerland and India. Gold dominated the merchandise trade, accounting for $192 bn (over a third) of the total, followed by telecommunications equipment, automobiles and diamonds. However, the heavy concentration of gold suggests that headline trade growth may partly reflect higher commodity prices rather than a notable increase in traded volumes.

. Activity rebounds following a June trough

The UAE’s non-oil private sector has regained momentum in recent months. After falling to a 5-year low of 50.8 in June, the S&P Global UAE PMI recovered to 52.7 in July and 55.3 in August, the latter being its highest reading since December 2024. (The PMI is a composite indicator covering manufacturing, construction, wholesale, retail and services.) The rebound was driven by stronger domestic demand, renewed export growth and easing logistics constraints, as firms adapted their supply chains and increasingly turned to local suppliers owing to regional constraints. New orders rose at one of the fastest rates in over two years, while improved deliveries allowed businesses to rebuild inventories. Cost pressures also eased and business confidence reached its highest level since April.

Oil inflation drives monetary policy tightening

Dubai’s retail inflation hardened further, from 5.3% in July to 5.5% in August, driven by rising fuel prices and airfares. Housing, though, was the largest contributor, adding 2.5 pp to the headline figures. A major regional bank, Emirates NBD, consequently raised its year-end inflation forecast for the Emirate to 5.6%, from an earlier 2.9%. (Updated data for Abu Dhabi was unavailable at the time of publishing this report.) Separately, Central Bank of the UAE (CBUAE) has revised its nationwide 2026 inflation forecast from 1.8% to 2.3%.

With the dirham pegged at ~AED3.7 to the US dollar, the UAE followed the US Federal Reserve’s September increase, raising its base rate by 25 bps to 3.9%. CBUAE’s three-month EILOR (Emirates Interbank Offered Rate), a benchmark for floating rate loans and derivates subsequently climbed to 4.35% by late September, increasing financing costs as economic growth weakens.

. Comparative Indicators and Forecasts