Green Shoots, Lingering Risks

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. East Asia . China . Politics and Policy . Anti-corruption campaign intensifies ahead of 2027 Party Congress With the Chinese Communist Party marking its 105th anniversary on 1st July, President Xi Xinping has continued to push his anti-corruption campaign at pace, highlighted by three key developments this quarter. Ma Xingrui, former Party Secretary of Xinjiang and sitting Politburo member, was placed under investigation in April for suspected ‘serious violations of law and discipline’, becoming the third Politburo member to fall under scrutiny in the current term. Vice Foreign Minister Sun Weidong was removed from his post the same month. In May, former Defence Ministers Wei Fenghe and Li Shangfu, both purged from the PLA in 2023, were sentenced to death with a reprieve, the most senior military figures to receive formal sentences under Mr Xi's campaign. The pace and seniority of the purges point to a political environment in which loyalty to the President is being enforced with increasing systematism as the 21st Party Congress in 2027 approaches.

. Central bank reform moves to legislative stage China’s ‘Two Sessions’, the annual parallel meetings of the National People's Congress and the Chinese People's Political Consultative Conference, set the broad policy framework for the year in March. Perhaps its most significant outcome was a draft revision to the People's Bank of China (PBoC) law, which clarifies the PBoC's macro-prudential mandate, strengthens its authority over systemic risk and formally establishes the legal status of the digital renminbi. This is another step towards the institutionalisation of central bank reform, previously left to administrative discretion. Alongside this, a broader Financial Law establishing unified mechanisms for systemic risk management across all financial sectors completed its public consultation period in April and is expected to be passed before year-end. Together, these laws represent an effort to build a regulatory architecture capable of managing a complex financial system under growing internal and external stress.

. Trade tensions ease but tariff environment remains unsettled The US Supreme Court's February 2026 ruling struck down a core pillar of President Trump's tariff regime, bringing the effective tariff rate on Chinese goods down to approximately 24% by April, a significant decline from the previous 47.5%. However, the USTR launched two new Section 301 investigations in March and proposed a further 12.5% forced-labour tariff in June, with both investigations set to conclude this summer, leaving the matter in flux. The Trump-Xi summit in Beijing on 14-15 May, the first US presidential visit to China since 2017, produced headline deals including a Chinese commitment to purchase $17 bn per year of US agricultural products and an initial order of 200 Boeing aircraft. Pulling away the window dressing, however, the deals appear to be on less-than-concrete foundations, with both sides describing the agreements differently and a proposed US-China Board of Trade still undefined in both scope and authority.

The Iran war has reinforced China's long-standing vulnerability over energy security. Despite decades of diversification, it remains dependent on a maritime system it does not control. In particular, independent refineries remain exposed, as discounted Iranian crude has dried up and freight and insurance costs keep climbing. On the China-India front, China overtook the US to become India's largest trading partner in 2025-26, with bilateral trade reaching $151.1 bn and India's trade deficit with China widening to an all-time high of $112.6 bn. India eased Chinese investment restrictions in March and the first Indian business delegation in over five years visited China in April. President Xi is set to visit India in September for the BRICS summit hosted by New Delhi.

. Outlook for the Markets . Strong Q1 growth masks a two-speed economy China's economy grew 5.0% YoY in Q1 2026 (Jan-Mar), accelerating from 4.5% in Oct-Dec, with QoQ growth at 1.3%. Manufacturing value-added grew 6.3% with high-tech manufacturing up 12.5% and equipment manufacturing up 8.9%, 6.4 and 2.8 percentage points faster than the industrial average, respectively. Industrial robot output surged 33.2%, against 28.0% for the full year 2025, and that of integrated circuits by 24.3%. Fixed asset investment turned positive in Q1, rising 1.7% after contracting 3.8% in 2025 as a whole, with equipment and instrument investment up 13.9%, high-tech investment up 7.4%, and infrastructure up 8.9% after declining 2.2% last year. The tertiary industry contributed 63.2% of GDP growth in Q1, up from 59.2% a year earlier, with IT and software services growing 10.6% and leasing and business services 12.2%, confirming services as the dominant driver of growth even as high-tech manufacturing accelerates alongside.

. Record trade surplus widens as consumption contracts Rapid industrial and export growth continues to co-exist with stalling domestic consumption. China’s trade surplus reached $264.7 bn in Q1 and stood at $105.4 bn in May alone, putting it on course to match or exceed last year's record $1.2 tn. Import growth has surged sharply with growth averaging around 25% in the first 5 months of 2026 compared to ~ (-)4.9% in the same period last year, driven by AI-related semiconductor demand and a policy commitment to open the domestic market to more foreign goods. The surplus, however, continues to widen as domestic consumption has failed to keep up. Retail sales growth collapsed from 6.4% in May 2025, falling each month after that and reaching -0.6% this May, the first contraction since December 2022, with larger retailers down 4.9% in the same month and overall sales falling month-on-month for two months in a row. China's real estate downturn, now in its fourth year, saw investment fall 16.2% in the first five months of 2026. The downturn continues to erode household wealth faster than any stimulus can offset. Meanwhile, youth unemployment fell to 15% in May but remains high enough to suppress discretionary spending. Beijing is under pressure to deploy meaningful consumption stimulus in the second half of 2026, with Q2 GDP data in July likely to serve as the trigger for any policy response.

. Renminbi appreciation pressure builds but Beijing holds the pace The renminbi touched a three-year high of 6.81 in mid-June, driven partly by a weakening dollar and partly by trade tension relief following President Trump's visit to Beijing. The PBoC responded by setting the daily rate weaker for three consecutive sessions, a routine deployment of its managed float mechanism to prevent appreciation from outpacing what the export sector can absorb. The IMF has estimated the renminbi's real effective exchange rate to be undervalued by 12–21%, and the European Central Bank has called for multilateral discussions around the currency's level. Voices within China are beginning to consider strengthening the renminbi too, with former Chongqing mayor Huang Qifan calling for a gradual, 15-20% appreciation over the next decade, arguing that a stronger currency would raise import volumes and cool the surplus organically. PBoC Governor Pan Gongsheng has signalled in more guarded terms that the exchange rate mechanism will be refined to give market forces a greater role. Regardless of the underlying appreciation pressures, any move to the renminbi will be slow, managed and unlikely to keep up with the pace expected by China’s trading partners.

. Hong Kong . Politics and Policy . Mr Lee advanced a domestic agenda centred on mainland alignment, civil service reform and AI development Hong Kong is formulating its first-ever Five-Year Development Plan, aligned with China's 15th Five-Year Plan (2026-2030). Public consultations began in early June, and the plan is expected to be released by year-end. Civil society space remains highly restricted under the National Security Law, with more than 60 pro-democracy organisations having disbanded since 2020. National security-related prosecutions have also continued, with court proceedings ongoing for activists arrested in previous years. Meanwhile, Chief Executive John Lee introduced a civil servant accountability framework that allows authorities to reduce salaries, mandate early retirement or dismiss underperforming officials. He has also taken personal charge of the Northern Metropolis, a major urban development zone on the mainland border designed to deepen integration with the Greater Bay Area. Hong Kong also unveiled HKGAI V3, its homegrown large language model, with a tenfold improvement in token compression efficiency and near-hundredfold improvement in agent runtime. This signals Hong Kong's intent to build sovereign AI infrastructure, reducing dependence on Western models and opening opportunities for AI integration across government and financial services.

. Central Asia engagement and treaty expansion signal Hong Kong's evolving international strategy Mr Lee's visit to Kazakhstan in early June yielded 43 agreements and a USD 100 mn co-investment framework, underscoring Hong Kong's efforts to deepen economic ties with Central Asia and position itself as a financial gateway between the region and China, with a direct Hong Kong-Almaty flight planned for 2027. The government also expanded visa-free arrangements with Kazakhstan, Uzbekistan and Kyrgyzstan to 30 days. Separately, Hong Kong signed double taxation agreements with Turkey, Norway, Kyrgyzstan and Barbados, bringing its treaty network to 57 agreements and reinforcing its attractiveness as a hub for cross-border investment

. Outlook for the Markets . Hong Kong posts its strongest quarterly growth in nearly five years, driven by AI-linked exports and a domestic consumption recovery Hong Kong's economy grew 5.9% year-on-year in Q1 2026 (Jan to Mar), up from 4% in the fourth quarter of 2025 and its strongest quarterly expansion since Q2 2021. It comfortably beat market expectations of 3.5%. The growth was widespread: private consumption rose 5.0%, gross fixed capital formation surged 17.7% and goods exports jumped 23.8%, underpinned by strong global demand for AI-related electronics and buoyant regional trade flows. The government has retained its 2026 GDP growth forecast of 2.5-3.5%. Downside risks due to the war in the Middle East have moderated following the US-Iran agreement on 14 June to reopen the Strait of Hormuz, alleviating concerns over further disruptions to global trade and energy markets. Inflation remained subdued from the previous month, with underlying CPI steady at 1.6% year-on-year in April. Although higher oil prices pushed up fuel-related costs, broader price pressures stayed contained, helped by Hong Kong's low energy intensity and stable energy supplies from mainland China. Unemployment held steady at 3.7% in the February to April period, with youth unemployment at 6.9%, its lowest since mid 2025.

. Hong Kong overtakes Switzerland as the world's largest wealth hub, but AI-driven capital rotation to mainland markets is a major headwind According to BCG's Global Wealth Report 2026, Hong Kong has overtaken Switzerland to become the world's largest cross-border wealth hub, with assets under management rising 10.7% in 2025 to $2.9 tn, fuelled by mainland Chinese inflows and a revival in IPO activity. Hong Kong is also building out its position as a global gold trading hub, handling ~25-27% of the global seaborne gold trade, with its zero-tariff regime giving it a cost advantage over the mainland's 13% VAT on precious metals, according to the Hong Kong Gold Industry Group.

. However, the equity market is signalling caution. The Hang Seng Index is up 1.5% YTD while the mainland's CSI 300 has climbed 6%; the divergence is starker in growth stocks, with the Hang Seng Tech Index down 5.5% against ChiNext's 25% surge. In early June, Goldman Sachs issued a global research note downgrading Hong Kong-listed Chinese stocks, advising clients worldwide to reduce exposure as mainland AI and semiconductor shares offer better returns. Mainland investors pulled 25 bn yuan ($3.7 bn) out of Hong Kong-focused funds in a single week, the largest weekly withdrawal on record. May also saw the first net monthly selling of Hong Kong stocks through Stock Connect in three years. Tellingly, when Tencent's Hong Kong-listed shares jumped 10% on positive AI news, mainland investors used the rally to sell HK$ 2.1 bn worth of shares rather than buy more.

. Primary income continues to anchor Hong Kong's current account as goods trade strains Hong Kong's current account surplus narrowed to HK$ 93.9 bn in Q4 2025, from HK$ 110.9 bn in the same period a year earlier. The goods balance swung from a surplus of HK$ 5.9 bn to a deficit of HK$ 32.5 bn, driven by a sharp rise in imports. The services account surplus widened to HK$ 37.9 bn, supported by strong inbound tourism and cross-boundary financial activity. Primary income (mainly earnings from Hong Kong's overseas investments) held firm at HK$ 93.3 bn, keeping the overall current account in surplus despite the goods deficit. On the trade front, import growth (29.9% YoY) continued to outpace export growth (23.8% YoY) in Q1, widening the goods trade deficit. The capital and financial account recorded a surplus of HK$ 132.4 bn in Q4, broadly stable from the prior quarter.

. Japan . Politics and Policy . Ms Takaichi is pushing a bold constitutional and security agenda after a landslide win Several months into her term at the head of an LDP-Japan Innovation Party coalition, PM Saneae Takaichi has used her supermajority to propose significant departures from Japan's pacifist political posture. In April, Ms Takaichi declared that ‘the time has come’ for constitutional revision, targeting Article 9, which bars Japan from maintaining offensive military capability and constrains the Self-Defence Forces (SDF), one of Asia's best-equipped militaries. The PM also seeks to introduce a state-of-emergency clause that would allow Cabinet orders to carry the force of law during a foreign invasion or domestic crises. These proposals have run into domestic opposition, with ~50,000 people rallying in Tokyo on Constitutional Memorial Day in the largest pro-constitution protest in decades. In late May, parliament enacted the National Intelligence Council Bill, upgrading Japan's intelligence architecture into a PM-chaired national agency, arguably the most significant intelligence reform since World War II. Domestically, Ms Takaichi's approval remains high, underpinned by her promise to suspend the 8% food tax and cut fuel duties, though the IMF has cautioned that such measures risk compounding Japan's already-strained fiscal position.

. Energy vulnerability drives diplomacy as Japan navigates a fractured neighbourhood Japan's dependence on the Middle East for over 90% of its crude oil has made the Strait of Hormuz crisis a defining pressure point. Ms Takaichi publicly offered to mediate and sought a call with Mr Trump; she also held a bilateral summit with Iran in April to preserve diplomatic channels. Japan has also expanded EPA negotiations with MERCOSUR, targeting Brazilian oil and Argentine lithium to diversify energy and trade partnerships. On the US front, Japan's $550 bn investment pledge, secured during 2025 tariff negotiations for a 15% tariff rate, remains intact with a second tranche of $73 bn announced in March. A deepening rift with China, triggered by Ms Takaichi's Taiwan remarks, has seen Beijing imposing retaliatory trade and tourism restrictions. Partly as a counterweight, Ms Takaichi and South Korean President Lee have deepened ties, holding 4 meetings in 6 months. Relations with India have also seen some momentum. The Quad foreign ministers, representing Australia, India, Japan and the US, met in New Delhi in May, announcing port and critical minerals pacts. A bilateral India-Japan workforce mobility seminar was also held in Tokyo the same week.

. Arms export liberalisation signals a new Japan for business The government has scrapped Japan's longstanding ban on lethal weapons exports, previously limited to 5 non-offensive categories. Fighter jets, missiles and destroyers can now be exported to 17 approved countries that have signed defence transfer agreements with Japan, a major structural opening for the defence industry. The move reflects a broader push to strengthen strategic industries, with the Japan-India Joint Vision for the Next Decade also deepening cooperation in semiconductors, AI, clean energy, critical minerals, defence and ICT.

. Outlook for the Markets . Japan's FY2026 outlook dampened sharply by oil shock Japan's economy grew 1.1% in FY2025 (April 2025 to March 2026), with nominal GDP touching USD 4.4 trillion. The FY2026 outlook has deteriorated sharply since then: the Bank of Japan (BOJ) now projects real growth decelerating to below 1%, with downside risks dominant, as the Middle East oil shock squeezes both corporate profits and household incomes. Headline inflation eased to 1.4% in April, its lowest since March 2022, held down by government fuel subsidies, though the BOJ projects this rising to 2.5-3.0% in the next months as crude costs feed through. The BOJ held its policy rate at 0.75%, its highest since 1995, while unemployment remains tight at ~2.4%.

. The yen has whipsawed on Hormuz developments while record inbound tourism faces headwinds from Chinese arrivals and currency volatility The yen has weakened sharply this quarter, hovering near 160/$. Japan's Ministry of Finance intervened in April-May, directing the BOJ to sell dollars and buy yen worth over $73.6 bn, its first such move since 2024, but those gains have since been fully erased. On tourism, Japan saw a record 42.7 mn foreign visitors in 2025. However, Chinese arrivals remain significantly depressed following Beijing's travel discouragement in response to Ms Takaichi's Taiwan remarks, a drag that has continued into this quarter. The 2026 Shunto wage negotiations delivered a 5.26% nominal wage increase, the highest in 33 years. After four consecutive years of real wage decline, this has raised hopes of a real wage recovery, though the energy shock now threatens to erode any gains before they materialise.

. Primary income continues to anchor Japan's current account surplus Japan's current account remains in surplus but has narrowed in recent months. In February, the surplus came in at JPY 3.93 tr, beating market expectations, but the goods balance narrowed sharply as import growth (9.7%) outpaced exports (2.8%) on surging crude costs. However, a large primary income surplus (earnings repatriated from Japan's vast overseas investment stock) – which grew to JPY 4.24 tr in February – remains an important buffer. On the financial account, inbound FDI has been picking up, driven by government-backed investment in semiconductors and AI. Portfolio flows have been volatile, with the Nikkei's record high above 65,000 in late May driven by expectations of a US-Iran deal and a Hormuz reopening. As the BOJ tightens and the rate differential narrows, yen appreciation pressure will build, compressing both export competitiveness and repatriated earnings.

. South Korea . Politics and Policy . Election sweep is overshadowed by a ballot crisis in Seoul In early June, the ruling Democratic Party swept 12 of 16 mayoral and gubernatorial races and 9 of 14 parliamentary by-polls. While none of this changes the country’s parliamentary arithmetic, in South Korea, local elections are seen as a referendum on the sitting president. These wins were tempered, however, by the party’s loss of Seoul, the most coveted mayoral post, to the conservative incumbent. Further, polls were marred by ballot paper shortages at some stations in Seoul, prompting criticism from across the political spectrum and triggering public protests demanding a rerun. Even the resignation by the National Election Commission (NEC) chief failed to assuage protesters. The NEC has promised a thorough investigation but maintains that the current laws do not provide for a rerun on account of ballot-paper shortages.

. Presidential approval ratings dip President Lee Jae Myung’s approval ratings have taken a hit, falling below 60% amid the public outcry over the ballot controversy. Prior to this incident, his ratings were buoyed by his pragmatic diplomacy and a booming domestic stock market. (Tech giants Samsung Electronics and SK Hynix both recently surpassed trillion-dollar valuations.) However, the rally was never broad and Mr Lee appears to have read in it the growing risk of wealth concentration, which might cause a political backlash. He has recently stated that the rise of industries generating ‘extraordinary profits’ may require a rethink of tax and distribution systems, possibly including a basic income system financed by a portion of the ‘excess profits’. He has also called for more ‘balanced growth’ within the country, pushing chipmakers to build in its less developed corners.

. Walking a tightrope between Washington, Beijing and Tokyo South Korea continues to navigate a testy relationship with America, and the frictions often go beyond rhetoric. Donald Trump has several times characterised South Korea as an ‘ungrateful ally’ even though President Lee has pledged to raise defence spending to 3.5% of GDP (from 2.7% last year) and the National Assembly has recently committed $350 bn to US supply-chain investments. With China, Mr Lee has managed to stabilise relations without resorting to subservience. Meanwhile, with Tokyo’s right-wing Prime Minister, he has forged a bond born of a shared understanding that the two neighbours must get along better if they are to manage both, a more assertive China and a less reliable America.

. New strategic roadmap with India President Lee made a state visit to India in April, the earliest by a Korean president after assuming office. A 5-year Joint Strategic Vision (2026-2030) was adopted covering trade, defence, technology and people-to-people ties. President Lee also made a pitch for Korea to massively ramp up its investments in India, stating that the number of Korean companies in India – currently ~700 – ‘could be ten times higher’. The two sides also committed to doubling the bilateral trade to $50 bn by 2030, and upgrading the existing CEPA to address India’s trade deficit with Korea, which widened to $15.4 bn in 2025-26, from $9.4 bn in 2021-22. A twelfth round of trade talks followed in New Delhi in late May. On defence, the India-Korea K9 Howitzer program is being extended into air defence systems, and a new defence accelerator, KIND-X, has been launched. Finally, underscoring their shared interests, the defence ministers of the two countries jointly inaugurated an Indian War Memorial, commemorating the 75 th anniversary of the Korean War and honouring the contribution of Indian troops.

. Outlook for Markets . Growth beats expectations, lifting 2026 forecasts South Korea’s GDP grew by 1.8% in Q1 (Jan-Mar) QoQ and by 3.8% YoY, supported by strong export growth (+5.9%), which in turn was driven by semiconductor demand and the broader AI ‘gold rush’. (Manufacturing grew 3.9% QoQ on the back of rising demand for computer, electronic and optical products, while investment in facilities surged by 6.6%.) Real gross national income grew by 9.2% QoQ, significantly faster than GDP, thanks to improving terms of trade and strong net factor income from the rest of the world. Looking ahead, the Bank of Korea has lifted its 2026 growth forecast to 2.6% from 2%, largely on the back of a semiconductor upcycle.

. Bank of Korea pauses again The central bank held its base rate unchanged at 2.5%, an eighth consecutive pause and the first policy decision under its new Governor, Shin Hyun-song, even though inflation has reasserted itself on the back of increased energy, commodity prices and supply constraints stemming from the Middle East conflict. As growth surprises on the upside, the Bank needs to balance two problems that call for opposite responses. This is also visible in the 2026 budget, set at KRW 728 tn, 8.1% higher than the previous year, with the fiscal deficit running at ~4% of GDP.

. Inflation forecasts are being revised up Consumer price inflation spiked in April, touching 2.6%, driven by rising global oil prices as well as demand-side pressures; core inflation stayed at 2.2%. Consequently, the official inflation projections for 2026 have been revised upwards, to 2.7% overall (up from 2.2% in February) and 2.4% in terms of core prices (from 2.1%).

. Record CA surplus; a weakening Won South Korea’s external position remains formidable. It has reported a current account surplus (CAS) for the last 36 months, which in April came to $28.3 bn, though this was down from March’s all-time high of $37.9 bn. This was driven by strong IT exports, which jumped 126%, including a 171% surge in chip shipments and 411% rise in computer peripheral exports from a year ago. The widening CAS has coincided with a weakening Won, currently over ~1550/$. The likeliest cause is Korea’s huge capital outflows, which are chasing foreign (mostly US) assets, which offer stronger perceived returns and a hedge against domestic uncertainties and Won depreciation.

. KOSPI rallies through volatility The KOSPI has seen one of the strongest equity rallies globally, powered by AI-driven semiconductor earnings. The rally has not been without risks: a sharp correction in the first week of June triggered by geopolitical pressures briefly wiped out over a tenth of the index’s value before the index surged past its previous high following the confirmation of a US-Iran peace deal. Meanwhile, foreign exchange reserves held steady at $427 bn in May, essentially unchanged from end-2025 levels.

. Taiwan . Politics and Policy . President Lai survives impeachment but loses ground In May, Taiwan held its first-ever presidential impeachment vote, triggered by a constitutional standoff regarding a contentious tax-revenue-sharing law. The motion against Lai Ching-te received 56 votes, 20 short of the count needed to send the case to the Constitutional Court. The combined seat count of the opposition KMT, TPP and two independents is 62, which suggests that the vote was staged to put the opposition’s objections on record rather than to actually impeach the President. The opposition’s strong leverage was also reflected in the budget approvals process. While Mr Lai had asked for NT$1.25 tn in special defence spending, he received 40% less (NT$780 bn).

. Cross-strait pressures mount The US has long maintained a practice of keeping Taiwan arms-sales decisions off the table in talks with Beijing. That changed during Mr Trump’s May visit to China, when not only did he discuss the matter with President Xi, but he even referred to it as a ‘very good negotiating chip’. Keeping up the pressure on Taiwan, China flew several sorties of PLA aircraft, and sailed as many as 16 PLAN vessels across the median line of the Taiwan strait in late May. For its part, Taiwan has leaned on mutual assistance agreements with Tokyo and Seoul. In April, for instance, the 3 countries ran tanker escort drills, effectively treating the US-Iran conflict as a rehearsal for a potential Chinese blockade. Meanwhile, the Taiwan Mainland Affairs Council’s latest poll (regularly conducted to gauge opinions on cross-strait affairs) showed that over 80% of respondents do not accept Beijing’s ‘one country, two systems’ proposal and over 90% believe their nation’s future should be decided by its 23 mn people.

. New energy security fears The Iran conflict again exposed energy security as one of Taiwan’s key vulnerabilities. The island imports 96% of its overall energy and relies on gas for ~50% of its power generation. The peace deal comes as a welcome development, as the link to chip manufacturing is both direct and immediate. In order to cap electricity prices, Taiwan had earlier topped up spot LNG cargoes at a cost of $620 mn. Against this backdrop, President Lai also announced plans to restart the Guosheng and Maanshan nuclear power plants, marking a sharp reversal in policy from a planned nuclear phase-out.

. Chips, workers and capital An Indian delegation with representatives from the BJP, the INC and smaller parties, was in Taiwan in early May at the Foreign Minister’s invitation, underscoring the cross-party nature of support for strong Indo-Taiwanese relations. The trip coincided with the finalisation of a deal for Taiwan to accept 1,000 migrant workers from India. India seeks to leverage Taiwan’s strengths as a leading chip-maker and AI hardware and electronics hub for the Make in India and Skill India programs. Conversely, it offers Taiwan a massive consumer market, as well as a credible hedge against Taiwan’s strong dependency on China-linked demand. The Tata Electronics-Powerchip fab, which is being built in Dholera, Gujarat, is the clearest sign that the partnership is real rather than aspirational. Meanwhile, the bilateral trade has more than doubled in the last 5 years, from $4.8 bn in 2020 to over $12.5 bn in 2025.

. Outlook for Markets . GDP growth surges to new highs Taiwan’s economy continues to outperform expectations. First-quarter GDP growth jumped to 14.6% YoY, the strongest quarterly expansion in 48 years. Reflecting sustained strength in technology exports and AI-related investment, the growth forecast for 2026 has been raised to 9.6% (from 7.7% in February), its fastest since 2010. (GDP per capita touched $39,515 in 2025 and is forecast to breach $45,600 this year.) Exports remain the primary driver, and are projected to surge 39.8% this year while imports rise by an estimated 33.5%.

. Rates held steady as inflation edges up CPI inflation touched 2.2% in May, moving above the central bank’s informal 2% threshold for the first time in over a year. However, inflation is expected to temper in the coming months, averaging ~1.9% in 2026, given receding geopolitical tensions as well as government measures to stabilise fuel prices. Consequently, the Central Bank of Taiwan – which has held its benchmark policy rate at 2% since March 2024 – is unlikely to tinker with rates in the near term. At a broad level, inflation remains manageable and there is a clear recognition in policy circles that the current growth surge is being driven mainly by rising productivity and robust exports.

. Strong reserves and a steady NT dollar Taiwan continues to benefit from substantial external buffers, with foreign exchange reserves holding firm at $605 bn in May, providing support against external shocks and financial market volatility. The New Taiwan dollar has remained relatively stable at a time of sustained flux, trading at ~31.6/$ levels.

. TSMC-led rally propels the stock market In the past year, the TAIEX index has more than doubled, propelled by surging investor demand for semiconductor and AI-linked stocks. The rally has been led overwhelmingly by Taiwan Semiconductor Manufacturing Company (TSMC), whose market capitalisation crossed $2 tn. Having briefly surpassed India in late May to become the fifth largest equity market by value, Taiwan’s benchmark has since retreated, returning it to the sixth position globally. The rally that drove the surge was overwhelmingly led by TSMC, which accounts for over 40% of the index. While this sharp concentration has amplified gains during the current upturn, it has also increased the market’s dependence on a small group of tech firms.

. Southeast Asia & Oceania . Australia . Politics and Policy . Opposition struggles to contain fragmentation on the political right With Australia's conservative vote continuing to fragment, far-right populist party One Nation remains on the ascendancy. This was most visible in the Farrer May by-election, where One Nation's David Farley became the party's first directly elected member of the House of Representatives, with the combined Liberal-National primary vote in the traditionally safe seat collapsing to ~20%. The result intensified pressure on Opposition Leader Angus Taylor. Meanwhile, the recent election of former prime minister Tony Abbott as Liberal Party President underscored the party’s own drift towards conservativism. Labor, meanwhile, strengthened its Senate position when a crossbench senator joined it, though the government still requires Coalition or Greens support to pass legislation.

. Albanese government tables the most ambitious budget in a decade Treasurer Jim Chalmers delivered the 2026-27 federal budget in May, centred on arguably the most significant housing and investment tax reforms in decades. From July 2027, negative gearing for residential property will be limited to new builds and the 50% capital gains tax discount will be replaced across all CGT assets, including shares and investment property, with cost-base indexation and a minimum 30% tax rate on gains from assets held more than 12 months. Both measures are before parliament and not yet law, with the opposition signalling resistance to the negative gearing changes. Beyond the tax reforms, the budget reinforces Canberra's focus on fiscal consolidation, defence capability and industrial policy, including funding for fuel security, critical minerals and strategic industries. A return to budgetary balances is projected over the longer term, though the outlook depends heavily on delivering welfare reforms amid rising expenditure pressures.

. Critical minerals strategy moves to the centre of industrial policy Australia is deepening its cooperation with Japan and the US on critical minerals, energy security and supply chain resilience, while advancing its planned Critical Minerals Strategic Reserve. Together, these initiatives reflect a broader shift towards active industrial policy aimed at strengthening Australia's role in strategic supply chains, though China's dominance of downstream processing remains a significant challenge. To this end, the country signalled a big step forward by opening new rare earth and high-purity quartz processing facilities at the ANSTO campus in Sydney, under the Australian Critical Minerals Research and Development Hub.

. Defence posture evolves amid growing geopolitical uncertainty The conflict in the Middle East has given a fresh impetus to Australia’s defence preparedness and energy security planning. Canberra temporarily halved fuel excise rates and committed funding to expand strategic fuel reserves while deepening defence cooperation with key partners, including an agreement to acquire 11 frigates from Japan and continued AUKUS implementation, including infrastructure to support greater US military presence in Western Australia. The government has simultaneously continued efforts to stabilise relations with China, reflecting an established approach of deepening security alignment with allies while maintaining constructive economic engagement with its largest trading partner.

. Outlook for the Markets . Growth slows as investment masks broader weakness Australia's GDP grew 0.3% QoQ in the March-ending quarter, bringing annual growth to 2.5%. This marked the weakest quarterly expansion in nearly 2 years. Growth was driven primarily by a sharp rise in private investment, particularly spending on machinery and equipment linked to large-scale data centre construction projects in New South Wales and Victoria. However, activity elsewhere in the economy was subdued even before the Iran conflict began. Government consumption declined following the expiry of electricity rebate measures, while net exports weighed on growth as coal and iron ore shipments were disrupted by Cyclones Koji and Mitchell and imports of capital goods and fuel increased. Looking ahead, growth is expected to remain tepid as higher interest rates and elevated energy costs weigh on household spending and business activity. Official forecasts currently point to growth of 1.75% in fiscal 2026-27.

. Inflationary pressures keep monetary policy restrictive Headline inflation rose to 4.2% YoY in April, well above the RBA's 2-3% target band, while trimmed mean inflation (a measure of underlying inflation that excludes extreme price changes) touched 3.4%, indicating persistent underlying price pressures. Inflation was driven primarily by transport and housing costs, with higher fuel prices and the expiry of government energy rebates contributing to the upward pressure. The budget projects headline inflation to peak at ~5% in mid-2026. In response, the RBA has raised the cash rate 3 times in the first 5 months of 2026, taking it to 4.35% in May. However, at its June meeting, the RBA left rates unchanged as it assessed the impact of earlier hikes and signs of slowing economic activity, while maintaining that inflation remains too high and that further tightening may still be required. While temporary fuel excise relief has helped moderate some cost pressures, inflation is likely to stay elevated through 2026 before easing gradually, keeping rates up.

. Consumption improves modestly, but households remain cautious Household consumption grew by 0.5% QoQ in the March quarter, up from 0.3% in Oct-Dec, indicating a modest improvement in consumer spending. Growth was driven primarily by essential categories such as food, health and transport, while discretionary spending was subdued across retail, hospitality and recreation. The household saving ratio fell to 6.2%, from 7.0% in the December quarter, suggesting households are beginning to draw down savings to support spending amid persistent cost pressures. Consumer sentiment also weakened following successive interest rate hikes, indicating that higher borrowing costs and elevated living expenses are likely to continue weighing on household demand through the remainder of 2026.

. Trade balance swings to a deficit for the first time since 2017 Australia's combined (goods plus services) trade balance recorded its first deficit since 2017, swinging from a surplus of AUD 1.1 bn in December 2025 to a deficit of AUD 2.4 bn in March 2026. Export earnings were hit by weather-related disruptions to coal and iron ore shipments, while lower commodity prices added to the weakness. At the same time, imports rose sharply, driven by higher fuel purchases following the oil price shock and strong demand for data centre-related equipment. Services imports also increased as the stronger Australian dollar boosted demand for overseas travel, transport and professional services. The terms of trade rose 1.1%, as a stronger currency reduced import prices and partially offset higher energy costs. Elevated imports linked to energy needs and digital infrastructure investment are likely to keep the trade balance under pressure through 2026.

. External balances weaken despite continued capital inflows Australia's current account deficit widened to AUD 27.1 bn in the March quarter, the largest on record, up from AUD 23.0 bn in the previous quarter. The deterioration was driven by a widening primary income deficit, reflecting higher profit outflows to foreign investors, alongside a shift to a goods and services deficit. Despite this, the capital and financial account remained in surplus at AUD 18.6 bn, supported by continued equity and debt inflows. Australia's net international investment liability position rose to AUD 707.6 bn at the end of March, highlighting the economy's continued reliance on foreign capital. Strong capital inflows, including investment linked to critical minerals and data centre projects, supported the Australian dollar during the quarter. While a stronger currency may help moderate imported inflation, it could weigh on export competitiveness going forward.

. Indonesia . Politics and Policy . Executive centralisation and rising state intervention The Prabowo administration continues to tighten its command over strategic sectors. An April government-wide working meeting directed ministers, echelon-one officials and SOE heads to revoke mining permits operating improperly in protected forests. The intervention escalated in May, when Mr Prabowo announced plans to channel coal, palm oil and ferroalloy exports through a new state subsidiary, ‘PT Danantara Sumberdaya Indonesia’, with technical regulations effective 1 June and existing licences valid until 31 December 2026. A concurrent rule requires most natural resource exporters to retain 100% of foreign exchange earnings in state banks for 12 months. Separately, Bank Indonesia (BI) is preparing regulations under an expanded legal mandate adding growth and job creation objectives alongside its existing price and exchange rate stability remit. The law also reportedly strengthens parliamentary leverage over BI’s board and introduces new removal mechanisms. The full legal text has not been released, but if implemented, the law could materially impact the credibility of future monetary policy and exchange rate management.

. Free meals programme hits governance crisis The country’s flagship Free Nutritious Meals program suffered a major setback in June. The Attorney General’s Office made arrests tied to procurement irregularities and kitchen foundation selection within the National Nutrition Agency, leading to the dismissal and replacement of its head. The 2026 allocation was simultaneously cut to ~$15.8 bn from ~$19.7 bn, forcing a slower and more selective rollout rather than the original rapid scale-up to 83 mn beneficiaries. The incident has raised questions about implementation quality across other presidentially-driven programs and reinforces investor concern about execution risk in a policy agenda dependent on discretionary, state-directed spending. The issue is that one of Prabowo’s flagship promises has already been forced into a slower rollout, exposing both fiscal pressure and weak execution. The programme remains large enough to shape how investors judge Indonesia’s budget discipline.

. Indonesia navigates the US–China minerals rivalry Indonesia’s position as the world’s dominant nickel supplier places it at the centre of an intensifying great-power competition for critical mineral supply chains. Tellingly, in recent months, Japan and South Korea have made inbound investment commitments, of $23.6 bn and $10.2 bn, respectively, concentrated in batteries, green energy, steel and digital infrastructure. Washington has separately been pressing Jakarta, through ongoing bilateral tariff negotiations, for access to Indonesian nickel, bauxite and rare earths – a push underpinned by America’s Project Vault strategic reserve program, which is designed to stockpile critical minerals and reduce dependence on Chinese-controlled supply chains. Meanwhile, underlining Indonesia’s importance to China, BI and the People’s Bank of China (PBoC) agreed to explore a larger bilateral currency swap line and deepen cross-border payment connectivity. At the same time, however, Reuters reported that Chinese companies behind Indonesia’s smelter expansion are scouting alternatives in Madagascar, Tanzania and New Caledonia, citing tighter ore quotas and cumulative policy risk. This points to a growing divergence between deepening state-to-state ties on the one hand and a hesitant private sector on the other.

. Outlook for the Markets . Monetary policy pivots sharply to currency defence Bank Indonesia made a decisive shift in policy in May. After holding the BI Rate at 4.75% at its April meeting, citing the need for exchange rate stability and a prudential, growth-supportive policy, the central bank raised rates by 50 bps to 5.25%, citing rupiah weakness linked to the West Asia conflict. Less than three weeks later, in early June, it delivered an unscheduled 25 bps increase, the first off-cycle hike in eight years, lifting the rate to 5.50%, explicitly because the rupiah had weakened beyond projections since May. (The currency slid from IDR 17,700/$ on 19 May to 18,190/$ on 8 June, a record low. FX reserves fell from $148.2 bn at end-March to $144.9 bn at end-May, equivalent to 5.5 months of import cover.) Plainly, shoring up the currency has now overtaken growth as BI’s dominant policy priority.

At the same time, external pressures are building. The current account deficit widened to $4bn, or 1.1% of GDP, in Q1, from $2.5bn, or about 0.7% of GDP, in the previous quarter. More recent trade data points in the same direction: the goods trade surplus had narrowed to just ~$90mn by April, equivalent to barely 0.03% of GDP. The trend suggests that the external cushion is thinning, with the CAD worsening QoQ and the merchandise trade buffer now close to disappearing.

. Growth holds firm; fiscal and external pressures build Indonesia’s GDP expanded by 5.6% YoY in Q1 2026 (Jan–Mar), above the administration’s 5.5% target. Notably, though, this was driven largely by government consumption spending, which surged 21.8%. Household indicators remain positive but show no clear acceleration: the consumer confidence index fell slightly between April (123) and May (120.9), but continued to hold well above the neutral 100 mark. Meanwhile BI’s Retail Sales Index has edged down from 256.7 in March to 226.9 in April and is projected to lose further ground when the May numbers are released. Banking gross NPLs remained contained at a modest 2.17% in April, broadly unchanged MoM from March. Conversely, rising fuel subsidy costs and rupiah depreciation are creating new debt servicing pressures. The World Bank’s latest (June 2026) growth forecast of 5% this year is based explicitly on large, front-loaded public spending.

. Commodity controls narrow; investor caution deepens Indonesia is following a targeted commodity centralisation framework. Nickel pig iron (NPI), which accounts for the bulk of Indonesia’s nickel export volumes, was explicitly exempted, alongside some refined palm oil derivatives. However, ferronickel remains included. Export duties on NPI and ferronickel planned from April 2026 have been postponed indefinitely, pending inter-ministerial coordination. The implementing entity is still hiring personnel and assembling its management structure, raising questions about operational readiness before formal control commences from September. How these controls sit alongside Washington’s ongoing tariff-linked push, itself part of the Project Vault critical minerals strategy, for open access to Indonesian nickel and bauxite is an open question.

. Singapore . Politics and Policy . A model for the future The Economic Strategy Review Committee (ESR) released its final report in June following interim recommendations that informed Budget 2026. Against the backdrop of slowing productivity, demographic ageing and a fragmenting global economy, the review marks Singapore's most significant rethink of its growth model in over a decade. It advocates for a shift towards a more interventionist approach built around three priorities: sharpening Singapore's value proposition, building resilience against external shocks and enhancing economic agility. Its 32 recommendations cover sector-specific priorities such as semiconductors, AI, biomedical sciences and carbon services, alongside broader reforms to strengthen regional headquarters, intellectual property ownership and corporate treasury functions. Other key highlights include expanding LNG bunkering and trading capabilities, improving access to growth capital for innovative firms and creating labour pathways to combat shortages. While attracting investment remains integral, the focus is now on capturing more value from that investment by embedding strategic capabilities that are harder to relocate. Future policy support will likely favour firms that deepen innovation and regional decision-making in Singapore.

. Translating policy intent Budget 2026, announced in March, began translating these priorities into policy. It expanded the Enterprise Innovation Scheme to offer 400% tax deductions on qualifying AI expenditure of up to SGD 50,000 and established National AI Missions across advanced manufacturing, connectivity, finance and healthcare. It also announced higher qualifying salary thresholds for Employment Pass holders, with the minimum salary for new applicants rising to SGD 6,000 from January 2027 and to SGD 6,600 in financial services (up from SGD 5,600). Similar increases were announced for S Pass thresholds as part of a push towards higher-productivity employment by raising the quality threshold for foreign labour. Separately, the Competition and Consumer Commission announced accelerated merger and antitrust procedures to reduce regulatory uncertainty for businesses.

. Technology-driven foreign policy Mirroring domestic AI prioritisation, technology is playing a deepening role in Singapore’s external position. This is most visible in ties with the United States, where Washington continues to use trade policy to advance industrial and geostrategic objectives. Following its March Section 301 investigation into alleged excess industrial capacity, the Trump administration has proposed a second investigation into forced labour against multiple trade partners. While the measure is still under public consultation with hearings in July, Singapore faces the prospect of tariffs of up to 12.5% on around a third of its exports to the US despite a longstanding FTA between the countries. Paradoxically, technology cooperation with the US continues to deepen through initiatives covering critical and emerging technologies as Singapore-based semiconductor firms expand their presence in the US to capitalise on AI-driven demand.

Within Asia, fuelled by complementary semiconductor supply chains, Taiwan overtook mainland China as Singapore's largest merchandise trading partner in 2025, with the bilateral trade reaching SGD 170.4 bn against China's 162.9 bn. Meanwhile, China's April 2026 decision to block and unwind Meta's $2 bn acquisition of Manus established a precedent to curb 'Singapore-washing', a practice where Chinese firms relocate operations abroad to avoid state controls. It has since extended outbound investment enforcement to cover cross-border technology transfers and overseas talent relocations. While Singapore traditionally benefited from its neutrality as a landing zone for Chinese tech capital seeking Western investment, the very factors that made it attractive to Chinese founders now carry a reversibility risk that no corporate restructuring can fully price out. For Singapore, where semiconductors account for a significant share of manufacturing output, the resulting uncertainty from both major powers is likely to weigh heavily on investment decisions.

. Outlook for the Markets . Trade and technology drive growth Singapore's GDP grew 6% YoY in Q1 (Jan-Mar) 2026, extending the 5.7% growth seen in the December quarter, and beating the Ministry of Trade and Industry’s (MTI) April advance estimate of 4.6%. Seasonally adjusted, QoQ growth eased slightly to 1% from 1.3% in the previous quarter. Manufacturing grew by 7.9%, moderating from 11.4% in Q4 2025, but AI-related demand continued to support the electronics and precision engineering clusters. Wholesale trade accelerated to 11.7% (from 9.9%), reflecting a growing machinery, electronic components and semiconductor equipment trade. This was mirrored in total merchandise trade growth, which jumped 25.6%, from 14.5% in Q4. Finance and insurance growth rose by 2 pp QoQ, to 5.7% in Jan-Mar, with broad-based growth in banking, fund management and securities dealing.

The services trade also accelerated to 4.4% from 2.2%, although growth remained considerably weaker than that of merchandise. Domestic demand was more subdued, with food and beverage services growing just 0.4% (from 0.2%) and retail trade 2.6% (from 2.3%), highlighting the continued divergence between domestic and export-oriented sectors. MTI maintained its 2026 GDP forecast at 2–4%, unchanged from February despite significantly higher downside risks stemming from the US-Israel-Iran conflict. The government expects continued AI-related capital expenditure to offset weaker conditions in energy-intensive industries, even as higher energy costs and disruptions across Singapore's refining and chemicals value chain weigh on parts of the economy.

. Monetary stability amid external risks Core inflation held at 1.4% in May, unchanged from April and below market expectations of 1.6%, while headline inflation remained stable at 1.8% for a third consecutive month. Price stability was made possible primarily by slowing services inflation, which offset increases in food and retail goods prices. Reflecting this easing trajectory, economists expect the Monetary Authority of Singapore (MAS) to hold monetary policy steady at its July meeting, with core inflation appearing to have peaked at 1.7% in March. MAS and the MTI maintained their 2026 inflation forecast at 1.5-2.5% for both headline and core inflation. However, risks remain tilted to the upside as higher energy costs continue to feed through global supply chains. While maritime traffic through the Strait of Hormuz has resumed following the US-Iran ceasefire, oil and gas flows are expected to take time to normalise and electricity tariffs are projected to rise sharply from July.

. Thailand . Politics and Policy . A stronger mandate, but delivery under early strain Three months ago, PM Anutin Charnvirakul looked on firmer political ground than any Thai prime minister has in years. In March, he had secured a renewed parliamentary mandate, with his coalition holding 290 seats of 500. An early-April policy address outlined a concrete reform agenda: an omnibus law to repeal outdated regulations within one year, a 'super licence' to fast-track investment approvals within 180 days, electricity market liberalisation, a carbon credit exchange, AI and semiconductor promotion and cost-of-living support through the ‘Half and Half Plus’ food-subsidy scheme. Investors believed that he would cut frictions for businesses, accelerate approvals and lean into digital and clean industry. By June, however, the government was consumed by crisis management. A deepening farm debt problem prompted the cabinet to announce a ~$5 bn subsidy package, while rising fuel and fertiliser costs have eroded confidence in the administration. Early signals suggest a note of caution around the under-preparation 2027 budget, which will be forced to balance economic reforms with fiscal probity.

. The Cambodia dispute shifts to legal confrontation... The Thailand-Cambodia border crisis has also deepened. Thailand had previously terminated the 2001 MoU on overlapping maritime claims; Cambodia responded by initiating compulsory conciliation under the United Nations Convention on the Law of the Sea (UNCLOS). Thailand agreed to join the UN-backed process in early June but simultaneously halted all other bilateral negotiations, including on land borders, and kept border crossings shut. The contested maritime zone covers roughly 26,000 sq km, with estimated hydrocarbon resources valued at up to $300 bn. The border trade remains disrupted, logistics across shared crossings are constrained and any resolution of offshore resource claims appears distant. Bangkok has maintained a parallel ASEAN channel, including a trilateral leaders' meeting with Cambodia and the Philippines at the 48th ASEAN Summit in Cebu on 7-8 May, signalling that it wants stronger treaty-based safeguards, while still keeping ASEAN as a diplomatic channel.

. Myanmar border pragmatism continues; refugee labour access expands... In contrast, Thailand has taken a more pragmatic approach to its relations with Myanmar. Foreign Minister Sihasak visited Myanamar’s planned new capital, Naypyidaw, in April, meeting senior military officials on security and border management. Crucially, too, Thailand's recent relaxation of work restrictions for camp-based Myanmar refugees has begun to produce measurable results. Over 5,500 refugees have so far entered legal employment, with roughly 80,000 estimated to be eligible to work formally. This represents a meaningful shift for labour-intensive sectors and border regions, which have long suffered workforce shortages. Thailand also recently signalled an ambition to act as an ASEAN-Myanmar bridge, participating in outreach discussions on the margins of regional meetings. However, there has been only limited, concrete diplomatic progress, given the continuing armed conflict and internal divisions within Myanmar.

. Outlook for the Markets . Exports surge as tourism and consumption soften GDP grew by 2.8% YoY in Q1 2026 (Jan-Mar), up from 2.5% in Q4 2025 (Oct-Dec). However, by April, the West Asia crisis had begun feeding directly into the channels where Thailand is most exposed. Exports surged 23.3% YoY (electronics up 72.3%, machinery and equipment up 31% and shipments to the US up 44.2%) reflecting both, tech-driven demand and some front-loading ahead of tariff uncertainty. Tourism moved in the opposite direction: inbound arrivals fell from ~2.8 mn in March to ~2.4 mn in April and tourism receipts dropped from ~$4.6bn to ~$3.7bn, with weaknesses most visible in West Asian and European markets hit by reduced flight connectivity. April manufacturing output fell 0.36% YoY and car production dropped to its lowest level in five years. The Bank of Thailand (BOT) cut its 2026 GDP forecast to 1.5% at its 29 April Monetary Policy Committee (MPC) meeting.

. Inflation reverses sharply; monetary policy stays on hold After eleven consecutive months of negative headline inflation, headline CPI inflation rose to 2.9% in April, from -0.9% in February, driven largely by energy costs linked to the West Asia crisis. Core inflation was more contained at 0.83%. Thailand's dependence on energy imports is substantial: IEEFA estimates oil and gas imports represent ~7% of GDP, with crude oil sourced from West Asia accounting for ~2.9% of GDP, well above many regional peers. Despite the shift in inflation dynamics, the BOT held its policy rate at 1% at its late-April MPC meeting, judging the supply-driven price rise insufficient to justify tightening in an economy still running below potential, and with household debt above 90% of GDP. The BOT now forecasts 2026 headline inflation at 2.9% and core inflation at 1.6%. Private credit growth has remained subdued (~2% or lower) for the last few months. Meanwhile, the Thai baht has weakened over the last 3 months, from 32.3/$ at the end of March to 33.2/$ at June-end, primarily on account of a broadly strengthening USD and Thailand’s heavy oil-import exposure.

. Digital investment sets a record; the investment mix shifts decisively On the upside, data from Thailand’s Board of Investment (BOI) indicate that applications in Q1 reached ~$30bn across 624 projects, approximately 2.4x larger than a year ago, with digital infrastructure alone accounting for ~$27bn across 48 projects. In early May, BOI approved new projects worth ~$28bn, including data storage, processing and cloud services investments, notably including a ~$25 bn investment by TikTok System Thailand. BOI's FastPass mechanism, a fast-track channel for large strategic projects to clear permits, coordinate across agencies and move from approval to implementation, has been expanded to 25 projects worth a cumulative ~$6.9 bn. Further, the government, in an April policy address, explicitly framed Thailand's ambition to become a regional digital and AI hub alongside a push into clean energy and electric vehicles. All of this has direct implications for power demand, industrial estates, telecoms and higher-value supply chains, though there are risks around electricity readiness and permitting capacity.

. External accounts swing to deficit; tourism policy tightens Thailand's external position has deteriorated visibly as the West Asia crisis has pushed up import costs while slowing tourism receipts. Imports rose 43.9% in April (raw materials and intermediate goods up 71.9%) producing a trade deficit of ~$6.8 bn and a current account deficit of ~$7.6 bn for the month. In parallel, the government imposed a significant tightening of tourism access in May: the 60-day visa exemption for 93 countries and territories was revoked, a 30-day exemption list was narrowed and the visa-on-arrival list was cut from 31 to 4 countries. The Tourism Authority of Thailand used the Thailand Travel Mart Plus in June to formalise a quality-led narrative, emphasising wellness, sustainability and meaningful travel, signalling a deliberate shift away from volume-based arrivals targets, though whether this holds if arrivals remain soft is unclear.

. Vietnam . Politics and Policy . Power consolidation formalised as new government takes shape Vietnam completed its leadership transition following the formation of the 16th National Assembly, with To Lam elected State President on 7 April while retaining his position as Communist Party General Secretary. This is a revival of the old dual-role structure, last seen in 2024, which consolidates authority around a single leader. Le Minh Hung was elected Prime Minister, heading a largely refreshed cabinet. The new leadership arrangement is expected to strengthen policy coordination and decision-making speed, while reinforcing the Communist Party's influence over government policymaking.

. China visit deepens strategic alignment To Lam's first overseas trip as President was a state visit to China from 14–17 April, underscoring the importance of the bilateral relationship under the new administration. The visit resulted in 32 cooperation agreements covering infrastructure, technology and supply-chain connectivity, while reinforcing the newly established China–Vietnam ‘3+3’ dialogue linking the foreign, defence and public security ministries of both countries. The two sides also agreed to deepen cooperation across development, security and cross-border connectivity, signalling Vietnam's growing reliance on Chinese capital, technology and infrastructure to support its growth ambitions, even as it seeks to preserve a strategic balance in its relations with the US and other major partners.

. US trade tensions intensify Vietnam has faced growing trade pressures from the United States, with multiple Section 301 investigations targeting issues ranging from excess industrial capacity to intellectual property protection and forced labour concerns. Added to this, Vietnam’s recent categorisation as a Priority Foreign Country under the 2026 Special 301 Report marks the sharpest escalation in bilateral trade frictions in over a decade, while raising the prospect of additional tariff actions. Although Hanoi has signalled its willingness to engage with Washington, the investigations add uncertainty to Vietnam's export outlook and cast some doubt on the longer-term sustainability of its trade model.

. Bamboo diplomacy faces growing pressures Alongside closer engagement with China, Vietnam continued to pursue its longstanding ‘bamboo diplomacy’ strategy of balancing relations among major powers. To Lam attended the Shangri-La Dialogue in Singapore and expanded engagement with ASEAN partners, including the Philippines, highlighting Vietnam's commitment to regional cooperation. However, rising US–China competition is making this balancing act increasingly difficult, particularly as Hanoi seeks to deepen economic ties with China while managing growing trade tensions with the US. The tension between these objectives is likely to remain arguably the main long-run challenge for Vietnam's foreign policymakers.

. Outlook for the markets . Growth remains strong, led by manufacturing and services Vietnam's economy expanded by 7.8% in the March-ending quarter, up from 7.1% in the same period last year. Growth was broad-based, with industry and construction rising 8.9%, services by 8.2%, and agriculture 3.6%. Manufacturing remained the primary growth driver, while wholesale and retail trade, transport and financial services supported activity in the services sector. Going into Q2, industrial production remains robust, expanding by 8.8% YoY in May. Growth is expected to moderate through the rest of 2026, however, with the World Bank projecting 6.8%, well below the government's target of ‘at least 10%’ growth. Rising energy costs, a widening trade deficit and rising trade frictions with the United States are expected to weigh on growth in the coming quarters.

. Inflation rises above target, limiting policy flexibility Inflation has perked up in the last few months, with headline CPI inflation rising from 4.7% in March to 5.6% in May (the highest since January 2020), exceeding the government's 4.5% ceiling. The increase was driven primarily by higher transport costs amid rising fuel prices, although price pressures also broadened across housing, construction materials and food. Core inflation climbed to 4.7% in May, the highest since March 2023, indicating that inflationary pressures are becoming more widespread. Despite this, the State Bank of Vietnam has kept its policy rate unchanged, relying instead on liquidity operations, credit growth guidance and foreign exchange intervention to support both price stability and growth. However, persistent energy price pressures are likely to constrain monetary policy flexibility in the coming months.

. Consumption remains resilient, supported by tourism Domestic demand remains resilient, with retail sales of goods and consumer services rising 10.9% YoY over Jan-Mar. Consumption was supported by rising household incomes and continued strength in tourism, with international arrivals reaching a record 6.76 mn in the first quarter. Spending on accommodation, food services and travel continued to outpace overall retail activity, reflecting robust demand for services alongside goods consumption. However, inflationary pressures could bite into household purchasing power, leading to slowing consumption growth in the near term.

. Trade shifts into deficit as imports outpace exports Vietnam's external trade position has recently weakened, with imports growing faster than exports. Over Jan-Mar, exports rose 19.1%, while imports grew 27%, resulting in a goods trade deficit of $ 3.6 bn, compared with a surplus of $3.2 bn, in the same period last year. The deficit widened further through April and May, bringing the cumulative goods trade deficit to $ 13.8 bn in the first five months of 2026, and reflecting strong demand for energy and industrial inputs. US remained Vietnam's largest export market, while China continued to be its largest source of imports. Although strong import growth reflects resilient domestic demand and manufacturing activity, rising trade imbalances and increasing trade tensions with the US pose downside risks to the external outlook.

. FDI remains strong despite rising external risks Foreign direct investment rose by 43% to $15.2 bn in Q1 (Jan-Mar), driven largely by manufacturing and processing industries. Disbursed FDI, which reflects actual investments as opposed to investment declarations, increased 9.1% to $5.4 bn, the highest first-quarter level in five years, reflecting Vietnam's continued attractiveness as a manufacturing and supply-chain hub. Looking ahead, the government has set out an ambitious framework for foreign investment through Resolution 10-NQ/TW, issued in June 2026, which targets $40–50 bn in annual registered FDI over 2026-30, up from $ 38.4 bn in 2025, while shifting the emphasis from capital volume to technology transfer and domestic supply-chain integration. However, with external conditions worsening in recent months, it is unclear whether these objects will be met.

. West Asia . Saudi Arabia . Politics and Policy . Religious tourism remains a stabilising force for the economy Against the background of the Iran conflict, Saudi Arabia was able to successfully host Hajj 2026 in May with over 1.7 mn pilgrims participating, including more than 1.5 mn from abroad. (An estimated 7% of Saudi’s GDP originates from Hajj-and Umrah-related activities.) The economic activity created around the Hajj and Umrahs has been relatively insulated from the Hormuz crisis and a continued source of financial stability.

. Labour reforms deepen the talent agenda Saudi Arabia has recently introduced major residency and labour reforms, including a new 5-year physical Saudi residency permit, skill-based work permit classifications, emergency visa extensions, and expanded labour mobility rules. This has been part of a larger move to attract and retain global talent to support priority sectors such as AI, cybersecurity, renewable energy and advanced manufacturing. The reforms reflect a broader recognition that human capital will be central to achieving the kingdom's diversification ambitions under Vision 2030.

. PIF pivots inward as conflict reshapes investment priorities In April the Saudi Public Investment Fund approved its 2026-30 strategy, allocating ~80% of its $925 bn portfolio to domestic investment and scaling back international exposure. The shift reflects a deliberate move towards building domestic ecosystems, further accelerated by the pressures of the Iran conflict. The PIF governor for the first time publicly announced that completing The Line at NEOM is not an essential 2030 goal, and the kingdom's most ambitious giga-project is being recalibrated under fiscal pressures. For foreign companies, this signals that PIF's appetite for international co-investments will narrow while domestic joint ventures in tourism, advanced manufacturing, clean energy and logistics will take priority.

. Saudi Arabia broadens its economic and security partnerships Saudi Arabia has been deliberately diversifying its strategic relationships ahead of any single-power dependency. The Saudi-Pakistan Strategic Mutual Defence Agreement, signed in September 2025, has since broadened into a wider regional security framework, with Turkey and Egypt drawn in alongside. On the economic front, Saudi has deepened ties with China, signing 42 investment agreements worth a combined $1.7+ bn covering advanced industries, smart vehicles and energy at a recent bilateral business forum. PIF opened its second office in China to anchor longer-term capital flows in both directions. While Washington remains a critical partner, the Iran conflict has reinforced Riyadh's desire for greater strategic autonomy and reorientation of their policies.

. Caught between Washington and Tehran Reports indicate that while Riyadh condemned Tehran publicly, it covertly launched air strikes on Iran’s drone and missile sites, while stopping short of a declared military campaign, calculating that entering one openly would invite deeper Iranian retaliation. The defence arrangement with Pakistan served as a pillar of Riyadh’s defence strategy. Rather than seeking a seat at the negotiating table, Saudi Arabia played a deliberate back-channel role, welcoming Pakistan’s mediation efforts and being regularly briefed by the four mediating nations.

. Outlook for the Markets . Growth holds in Q1 2026 Saudi Arabia’s GDP grew by 3% in the first quarter of 2026, driven by an all-round (oil + non-oil) expansion. Non-oil activities contributed the largest share (1.7 pp) to annual growth, with oil adding 0.8 pp. However, on a QoQ basis, GDP contracted by 1.2% over Jan-Mar, pulled down by a 6.8% decline in oil activities. The IMF is currently projecting growth in 2026 to be ‘about 2%’ – a steep downward revision from its April forecast of 3.1%, and well below its 2025 growth rate of 4.5%. A rerouting of oil shipments via the East-West pipeline and Red Sea ports, combined with Aramco's overseas inventories, have limited the immediate damage to their economy. The kingdom's low government debt, ample foreign reserves and the PIF's scale also provide buffers.

. Domestic demand remains resilient Government final consumption expenditure grew 11.3% YoY, reflecting sustained fiscal stimulus, while private final consumption rose 5.3%. Gross fixed capital formation expanded 3.9% year on year, though it declined 4.7% on a quarterly basis.

. Oil export surge masks non-oil weakness On the surface, Saudi Arabia’s merchandise trade data remains healthy, but a more detailed break-down of the numbers presents a more worrying picture. The country set a new monthly trade surplus record in March, mainly driven by a 37% surge in oil export values, and then saw the surplus double year-on-year in April. However, these figures are bolstered by surging oil prices and falling import volumes (which fell 31% in March and then by 5% in April). Further, non-oil exports (not including re-exports) fell 27% in March and 7% in April, reversing gains made through 2025. Plainly, the war has set back the country’s diversification targets, undoing years of policy work. Whether that reverses in the near term depends almost entirely on how quickly Hormuz normalises and supply chains recover. China remains the top destination for Saudi exports at ~14%, followed by India and Japan at 13% and 9%, respectively. On the import side, China accounted for ~27% of total imports, followed by the US at ~8% and the UAE at ~7%.

. Investment pivot deepens The most recent available FDI data (from Q4 2025), showed net inflows of SAR 48.4 bn, up 90% YoY, though this was driven mainly by an 84% decrease in FDI outflows. FDI outflows stayed low throughout 2025, as the PIF redirected capital toward domestic priorities. The Vision 2030 recalibration, including scaling back giga-projects, refocusing on AI, mining and tourism was already underway before the war on fiscal realism grounds, now the conflict has added a separate layer of uncertainty. Iranian strikes have also damaged Saudi Arabia's image as a safe, stable destination for foreign capital.

. United Arab Emirates . Politics and Policy . UAE exits OPEC, signalling its growing divergence from GCC The UAE's decision to leave OPEC after nearly six decades signals a more assertive energy strategy centred on national interests. However, the move has had little immediate impact on oil markets, which remained disrupted by the Hormuz crisis through most of the quarter (The UAE was previously constrained by an OPEC production quota of ~3.4 mn barrels per day, far short of its current ~4.9 MBPD capacity). ADNOC (Abu Dhabi National Oil Company) has now fast-tracked $55 bn in project awards for 2026-28 to seize on new market opportunities. The decision to exit OPEC also highlights a growing division amongst the Gulf states, with the UAE focused on market share and Saudi Arabia on price stability. To companies operating in the region, one key takeaway is that the GCC countries are pursuing increasingly divergent economic and strategic objectives and businesses should undertake more nuanced, country-specific analyses.

. AI moves from advisory function to governing mandate The UAE is moving AI from a mere technology initiative to a core element of government decision-making. In April, it renamed the Ministerial Development Council as the Ministerial Council for AI and Development, with responsibility for reviewing policies, legislation and government strategies in these areas. This is part of a broader effort to embed AI across federal operations, aiming to transition half of all public-sector services and processes to agentic AI systems within the next 2 years. Companies engaging with public-sector entities should expect procurement, compliance and regulatory interactions to become progressively more digital, automated and data-driven.

. Strengthening global partnerships with key economies In April, Crown Prince Sheikh Khaled bin Mohamed bin Zayed Al Nahyan visited China to sign 24 agreements spanning trade, investment, energy and advanced technologies. Beijing remains a central trading partner as well as an increasingly important source of investment and technology collaboration. Simultaneously, the US relationship is being deepened through multi-billion-dollar investments in AI, energy and advanced manufacturing, alongside a series of major commercial agreements, including Etihad Airways' $14.5 billion commitment to Boeing, being announced in recent months. The India relationship has also deepened, with PM Modi's May visit to Abu Dhabi producing seven agreements spanning energy storage, LPG supply, defence and AI, alongside a $5 bn Emirati investment pledge.

. Targeted by Iran, UAE banks on early Hormuz access Iran struck UAE territory in early May, though most attacks were intercepted by Emirati air defences. The country closed its Tehran embassy, summoned Iran's ambassador and filed a formal protest. The UAE also co-sponsored a UN Security Council resolution demanding Iran cease attacks on commercial shipping in the Strait, while participating in Gulf backchannel diplomacy to contain escalation. With the June US-Iran memorandum of understanding under strain, full normalisation of trade and shipping can be expected to be at minimum four months away.

. Outlook for the Markets . Growth slowdown projected for 2026 The UAE’s GDP grew by 6.2% in 2025, with non-oil GDP up by 6.8%. Non-oil activity's share of real GDP has risen to 77% of the total GDP, up from 72% in 2020, reflecting the country’s agenda to diversify its economy. Looking ahead, the IMF's April 2026 World Economic Outlook projects growth slowing sharply to 3.1% in 2026, built on assumptions of prolonged disruption to Gulf oil-sector activity from the region's conflict. However, other more recent forecasts have pegged the 2026 numbers sharply lower; rating agency S&P, for example, expects the economy to contract by 2.7%.

. War and fuel costs push UAE inflation Inflation in Dubai surged from 2.7% YoY weeks before the war started, to 3.8% in March, 4.8% in April and a forecast peak of 5.4% in May, as per Dubai Statistics Centre data. Across the country, inflation averaged 1.3% in 2025, held down by declines in transport costs and textile prices and favourable developments in food prices. The Central Bank projects 1.8% inflation in 2026 and 2.0% in 2027, but these forecasts assumed ‘broadly stable global commodity markets’ and its data cut-off (mid-February) predates the war by two weeks. The IMF's current projection sits at 2.5%, up from its own pre-war estimate of 2.0% last October, but these, too, are likely to prove low.

. Hormuz disruptions weigh on trade and sentiment High-frequency indicators suggest that the UAE’s growth momentum is softening. The S&P Global UAE PMI fell sharply from 55 in February to 52.1 in April, improving slightly to 52.6 in May but remained below its long-run average of 54.3. New business growth slowed sharply and export orders contracted in April and May. Hormuz disruptions lengthened supplier delivery times throughout and firms faced rising input costs. By May, input costs rose sharply, but soft demand forced firms to absorb rather than pass on the increase, marking the first cut in selling prices since June 2025. Tourism, retail and logistics were particularly affected, while businesses faced higher input costs and rising selling prices. Despite the weaker monthly readings, S&P Global found year-ahead confidence holding firm in May, treating the disruption as a temporary setback.

. Near-term outlook hinges on duration of disruptions The UAE’s exports through Jebel Ali and Khalifa Port were severely hit, with vessel crossings falling sharply at the height of the disruption. What cushioned the impact was the Fujairah and Khor Fakkan Ports, which took on cargo rerouted away from Hormuz. Growth forecasts released before the conflict are likely to be revised down, with some forecasters already trimming their expectations for 2026. Even so, the UAE remains better placed than many regional peers to weather the shock, owing to its diversified economic base, ability to re-route oil exports through alternate pipelines and substantial sovereign wealth reserves providing important buffers. Businesses also remains broadly optimistic that the current disruptions will prove temporary.

. Comparative Indicators and Forecasts