How Do ASEAN Countries Fare in Managing Global Economic Shocks?

Malaysia’s economy has continued to grow strongly this year despite global uncertainties, supported by strong demand for electronics, petroleum products and liquefied natural gas (LNG). How sustainable is this growth and what factors are driving it?

GOH: Malaysia’s export performance has been exceptionally strong, with June exports surging 45.4 per cent year-on-year and first-half growth accelerating to 27.5 per cent from just 4.1 per cent a year earlier. While this reflects improving structural drivers underpinning the economy, not all of the momentum should be viewed as permanent. Malaysia continues to benefit from global supply chain diversification, reflected in cumulative net foreign direct investment (FDI) inflows of around US$19 billion since the fourth quarter of 2024, alongside sustained AI-driven demand that is supporting semiconductor and broader electronics exports. Industry feedback suggests visibility for orders remains solid through the end of the decade, supporting longer-term growth prospects.

That said, part of the recent export strength appears cyclical. Some shipments have likely been front-loaded ahead of potential trade, tariff and shipping disruptions, while re-export activity has boosted headline figures without generating significant domestic value added. Meanwhile, higher export value of petroleum products and LNG have been supported by heightened geopolitical risk premiums and could moderate as global tensions subside. On balance, the outlook remains constructive, although growth is expected to moderate in the second half of 2026, partly due to less favourable base effects, as growth in the same period last year was relatively strong.

Throughout the heightened Middle East conflict and the closure of the Strait of Hormuz, Malaysia has remained steadfast in the continuation of fuel subsidies for its population. How has this affected fiscal sustainability and the country’s energy transition?

GOH: The RON95 and diesel subsidy bill has increased five-fold, from around MYR800 million to approximately MYR4 billion per month, and is estimated to exceed the original budget allocation by a further MYR20-25 billion. Nevertheless, higher petroleum-related tax and royalty receipts, more efficient operational spending and potential one-off revenue measures would help to keep the fiscal deficit close to the government’s target of 3.5 per cent of gross domestic product (GDP). There are now broader tools for fiscal management since reforms started three years ago. Even if the target is missed, the deviation is likely to be modest, with stronger nominal GDP providing additional support.

There are valid reasons for maintaining fuel subsidies, particularly as they cushion households and businesses from external shocks and help contain inflation. More importantly, recent reforms to reduce leakages and introduce quotas have improved the effectiveness of the subsidy framework. While the government remains committed to the Fiscal Responsibility Act’s medium-term consolidation goals, subsidy rationalisation remains politically challenging. Ultimately, fiscal consolidation must be pursued through a combination of targeted subsidy reforms, revenue enhancement, spending efficiency and stronger governance. The reforms implemented so far represent a meaningful first step and lay the groundwork for future fiscal and energy transition objectives.

Thai Prime Minister (PM) Anutin Charnvirakul began his second term in March 2026 amid slow economic growth, high household debt and rising energy prices caused by the Middle East conflict. How has he performed so far?

HANSAKUL: In terms of handling the near-term economic challenges, PM Anutin has passing marks in maintaining economic stability and preserving growth amid higher oil prices. The start of Anutin’s premiership coincided with the outbreak of the US-Iran war. Inflation has spiked but remained below the central bank’s target of 3 per cent, held back partly by some targeted subsidies. The speedy implementation of the Thai-Help-Thai Plus scheme (approved in May and disbursed in June) appears to have supported household consumption, although this will add to the fiscal burden. Anutin has also been the beneficiary of a more stable political outlook, underpinning a nascent trend of improving consumer and business confidence and continuing FDI inflows. While some near-term problems have been contained, many structural challenges remain. The economy has benefited from being part of the global electronics supply chain, which has delivered exceptionally strong export growth. However, the export and manufacturing sectors’ growth follows a “K-shaped” (or dual-track) pattern observed in other economies. This means that much of the population does not partake in the benefits of this AI-driven growth.

Thailand’s THB 400 billion emergency borrowing plan includes immediate relief and longer-term energy transition funding. Does this signal a lasting commitment to energy security or could the plans be derailed?

HANSAKUL: On paper and in terms of financial commitment, there are reasons for hopes of a positive outcome. Half of the emergency funding package is earmarked for green transitioning, cutting the country’s high reliance on imported fossil fuels and building capacity for clean energy supply. The proposed plan is broad-based, covering different groups of users: households, farmers and businesses, all of which will enjoy easier and cheaper access to clean energy, like solar power and bioenergy. In addition, the plan aims to accelerate electric vehicle (EV) adoption and provide grants to help small and medium-sized enterprises (SMEs) upgrade to adopt more energy-efficient and low-carbon production alternatives. If successful, the plan could see a rise in the adoption of clean energy, and in time, be broad-based and have far-reaching impacts. Separately, the government has switched from providing blanket subsidies on energy and utilities prices, opting to provide tiered subsidies where light users of electricity pay less and heavy users pay more, aiming to encourage responsible consumption.

The Philippines’ growth is expected to lag behind the region due to cuts in public infrastructure spending and the impact of higher energy prices. Given governance and fiscal constraints, what can the government do to cushion the impact on households and businesses?

ROSLI: Despite governance and fiscal constraints, the government still has credible policy levers to cushion the economy. The priority should be targeted fiscal support, including the Assistance to Individuals in Crisis Situations (AICS) programme and energy-related assistance for vulnerable households and affected businesses, which provide relief while limiting fiscal leakages.

Additionally, improving budget execution and accelerating high-impact infrastructure projects through public-private partnerships (PPPs) can sustain investment and employment without significantly increasing fiscal pressure.

We can expect the Bangko Sentral ng Pilipinas (BSP) to raise its policy rate by two more hikes in 2026, bringing it to 5.25 per cent, as inflation remains above target and external risks persist. Although tighter monetary policy may moderate growth in the short term, it should help anchor inflation expectations, support the peso and preserve macroeconomic stability. Together, these measures offer the most credible policy mix to support households and businesses amid ongoing shocks.

In July, the Philippines became an upper-middle-income country under the World Bank’s classification, after decades as a lower-middle-income economy. Despite this progress, the country remains vulnerable to supply shocks and natural disasters. How can the Philippines sustain its development as access to development funding gradually declines?

ROSLI: The Philippines’ transition to upper-middle-income status is a positive milestone that strengthens its investment profile. While access to concessional financing from multilateral institutions may gradually decline, current assessments suggest this to materially constrain public investment in the near term. The government has strengthened its fiscal position, maintains good access to domestic and international capital markets and continues to prioritise infrastructure spending under its proposed PHP7.2 trillion 2027 national budget.

The reclassification could also enhance investor confidence and encourage greater private sector participation through PPPs and FDI. Initiatives such as the Philippine Sustainable Development Goals (SDG) Investor Map, Climate Finance Strategy and green bond framework provide credible avenues to mobilise sustainable private capital. While the Philippines still ranks 80th out of 169 economies, with an SDG Index score of 69.9, continued fiscal discipline and structural reforms should support more resilient, inclusive and sustainable long-term growth.

Indonesia’s economy grew strongly in the first half of 2026, supported by higher government spending, but slowing exports and investment and the Middle East crisis have narrowed fiscal space. How can the government manage this pressure without hurting the economy or triggering public backlash?

NEGARA: Fiscal stimulus has been critical to support growth in Indonesia. With subsidies, cash transfers, the free nutritious meals (MBG) and rural cooperative (Kopdes) programmes, among others, Indonesia’s economy managed to achieve 5.45 per cent growth in the first half of 2026. However, too much reliance on fiscal support is not sustainable. Indonesia needs to increase private investment rather than continue reliance on state-driven spending.

The Middle East shock, which caused a significant increase in energy prices, makes fiscal stimulus more difficult to sustain. The government estimated that higher energy subsidies could require another Rp90-100 trillion, making the fiscal deficit soar.

Jakarta needs a budget reallocation rather than austerity. Cutting social programmes abruptly or raising subsidised fuel prices could weaken consumption and may generate political backlash. The government could improve the targeting of fuel and Liquified Petroleum Gas (LPG) subsidies, postpone lower-return populist projects (such as MBG and Kopdes), cut inefficient spending and use the remaining fiscal space to protect productive investment, SMEs and vulnerable households.

Danantara was established in 2025 to drive industrialisation, economic growth and the better management of state assets. However, concerns remain about its accountability and governance. Are the measures taken so far enough to build investor confidence, and what further safeguards are needed?

NEGARA: I think Danantara is burdened by too many ambitious goals, including supporting President Prabowo’s 8 per cent growth target, and turning unprofitable state-owned enterprises (SOEs) into commercial assets. While Rosan Roeslani, Danantara CEO, said that Danantara is subject to public audit, concerns remain about its governance and transparency, as there is still an unclear separation between commercial investment decisions and political priorities.

Foreign investors want to see a proven track record and concrete commercial projects to build their trust in Danantara. It will take some time and serious effort for Danantara to prove that the agency is a credible investment partner. It needs to show transparent disclosure of investment returns and liabilities, and indicate clear procurement and co-investment rules. Major investments should also disclose their commercial rationales and expected returns, to convince investors.

The critical safeguard for Danantara would be institutional independence. It needs to show that its investment decisions would survive a change of president or regulations. It needs to demonstrate that projects are selected on economics rather than political considerations. Without that, there is little chance that global capital will come.

Vietnam’s economy continues to grow strongly, supported by exports and investment, while the country is becoming a major FDI destination and AI hardware hub. What do developments in this space say about the trajectory of geostrategic hedging between the US and China going forward?

GIANG: Vietnam’s hedge is still paying off, but success has made the balancing act more precarious. Washington increasingly sees Vietnam’s reliance on Chinese supply chains and America’s widening deficit with Hanoi as two sides of one strategic vulnerability. The US has opened three Section 301 investigations into Vietnam this year (more than any other economy faces), covering forced labour, industrial overcapacity and intellectual property. The trade figures explain why: in the first seven months of 2026, Vietnam’s US$91.4 billion surplus with America was almost exactly offset by a US$93 billion deficit with China. Hanoi’s room for manoeuvre is narrower than even when Donald Trump unveiled his ‘reciprocal’ tariffs last year.

The deeper weakness lies at home. Foreign-invested firms generate 80 per cent of exports and their shipments grew by 26 per cent this year against 5.8 per cent for domestic ones. Vietnam can keep hedging, but its next task is less to attract foreign factories than to embed them in local supply chains: the only route to the strategic autonomy that Vietnamese leader To Lam prizes.

Vietnam’s strong fiscal position has helped cushion the impact of higher fuel prices from the Middle East conflict. Where does the country stand on its medium-term energy transition and is this a policy priority?

GIANG: Vietnam weathered the energy shock well, but it exposed three strategic weaknesses. The first is import dependence. Its two refineries run partly on imported crude; Vietnam buys substantial volumes of refined fuel abroad and it holds no meaningful strategic petroleum reserve. The second is a distorted market. Subsidised, politically managed electricity prices blunt incentives to invest. Electricity demand is growing by 13 to 14 per cent a year, almost twice the 7-8 per cent increase in supply. As it wants to attract more energy-intensive sectors such as data centres and semiconductors, the gap between what Vietnam needs and what its system can deliver is becoming dangerous. The third is the tightening trade-off between growth and decarbonisation. Manufacturing ambitions require abundant, reliable power but coal still carries much of the load. Renewables, grids, storage and nuclear all feature in the medium-term strategy, but delivery lags. The test is therefore reforming prices and mobilising investment without sacrificing growth, energy security, and not least, public support.

Recent geopolitical tensions, including the US’ war against Iran, have exposed vulnerabilities in global trade, energy and supply chains. How well is ASEAN prepared to respond collectively, and what has worked best in strengthening regional resilience?

TIJAJA: ASEAN has been quick to respond to recent shocks through the convening of special meetings to deliberate on their impact, issuing collective statements expressing shared concerns, reaffirming the region’s shared principles and positions (open market, rules-based multilateral trading system, ASEAN unity and centrality), and committing to accelerate implementation of relevant ASEAN frameworks and initiatives.

ASEAN has numerous frameworks and initiatives to deal with different shocks, whether in finance, food, or energy. While many were launched decades ago, not all are readily operational or their use remains limited. Accelerating their operationalisation is key. Today’s crises are becoming more frequent and multidimensional, warranting a more holistic consideration and coordinated response across pillars and sectors.

ASEAN can better anticipate and respond to these external shocks by having a platform to seek expert insights and industry feedback and coordinate a ‘whole-of-ASEAN Community’ response. ASEAN could redouble its effort on regional market integration and supply chain diversification, including by improving free trade agreements’ (FTA) implementation and utilisation.

Going forward, what additional regional initiatives or policy reforms should ASEAN prioritise to strengthen its ability to withstand future geopolitical and economic shocks, particularly in areas such as energy security, supply chain resilience, food security and financial stability?

TIJAJA: The immediate step is to have a mechanism for early deliberation and coordination on geopolitical and geoeconomic risks, and for coordinating responses to shocks. Studies on and the monitoring of selected supply chains will help ASEAN identify, track and address key vulnerabilities. Business councils and industry associations can complement officials’ efforts by checking on the impact of these shocks on firms and their strategies and responses, seeking their feedback on the effectiveness of government actions and the support they need. Equally important are having a shared approach to deal with other countries’ geoeconomic measures, to avoid co-optation into other countries’ security agendas, and having some discipline or commitments across the membership when introducing such measures, avoiding ‘beggar-thy-neighbour’ principles, respecting ASEAN unity, centrality and commitments and allowing consultation and/or advance notice of policies or measures to the extent possible.

Continued efforts to address trade costs, facilitate investment and optimise complementarities across ASEAN Member States (AMS), accelerate the entry into force and ensure the effective implementation of the upgraded ASEAN Trade in Goods Agreement(ATIGA) and the upcoming ASEAN Digital Economy Framework Agreement(DEFA) will contribute to greater resilience.

Likewise, moving forward on relevant initiatives such as the ASEAN Power Grid, the Trans-ASEAN Gas Pipeline, multilateral power trade, diversification of energy sources and routes, climate-smart agriculture and the ASEAN Food Security Information System, among others, should be prioritised. AMS’ efforts should be focused on implementation of existing commitments, monitoring and enforcing implementation, not new declarations, frameworks and plans.

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Editor’s Note:
ASEANFocus+ articles are timely critical insight pieces published by the ASEAN Studies Centre.