ASEAN Perspectives: Domestic divergence

HSBC flags that three economies in ASEAN will likely outperform by growing in line with their potential or more in 2026. They are Malaysia, Vietnam, and Singapore. Not only have they been successful in ensuring that the benefits of trade spill over to the domestic economy, but their fiscal engines will likely play a major role in lifting growth.

Conversely, HSBC expects growth to underperform their potential in the Philippines, Thailand, and Indonesia, wherein monetary policy will, eventually, need to step in.

Trade spillover

The spillover from trade can be assessed by how well the job market is performing and by how much wages are rising. And, right off the bat, wages in the more trade dependent economies of Singapore, Malaysia, and Vietnam grew faster than the wages in Thailand, and Indonesia in 2025. The Philippines saw its average wages grow the second fastest this year, but this is a special case which we will discuss later.

With higher wages, retail sales in Vietnam grew 9.6% y-o-y until November 2025. Confidence in the economy also persists, with credit growth in late 2025 still on the rise. In contrast, Indonesia’s wage growth was the slowest. Other indicators, like consumer sentiment and vehicle registrations, also point towards moderation in demand. Though Indonesia has gained market share in global exports, its outperformance in trade did not translate to stronger domestic demand, as about half of its exports are commodity linked with limited backward linkages.

Malaysia and Thailand offer an interesting comparison. Both economies are in the best position in Southeast Asia to ride the AI bandwagon. Both also have the same tariff advantage vis-à-vis China. But the two countries differ in outcomes because of their relationship with China’s supply chains, particularly China’s oversupply of manufacturing goods.

Malaysia’s concentration in electronics and its complementary relationship with mainland China’s supply chain has helped increase the efficiency and profits of its domestic manufacturers; they are able to import cheaper inputs from China, assemble them, and export them abroad at competitive prices. Business sentiment here remains robust, if not increasing.

On the other hand, a big portion of Thailand’s manufacturing base competes directly with China, such as in automobiles and parts. With Chinese manufacturers selling goods in ASEAN at very competitive prices, manufacturers in Thailand are finding it hard to compete. As a result, Thailand is the only country in the region where the capacity utilisation rate of its industries is declining.

In the same vein, sentiment in Thailand has diverged; large-sized industries continue to feel upbeat while sentiment among small and medium-sized enterprises continues to deteriorate. This may be because large-sized firms are riding on the AI bandwagon while smaller firms compete with Chinese imports. Unfortunately, c70% of the population are employed in small to medium-sized firms, which, in turn, drags down consumption.

The Philippines offers an interesting case. The country’s BPO sector (Business Process Outsourcing) has ridden the tailwinds of AI by providing labelling and annotating services to the AI supply chain.

But, here, higher wages are not translating in to stronger consumption. This is because households have, finally, begun to save. After three years of high inflation eroding the purchasing power of Filipino households, households are likely using their higher wages to recuperate their savings. The recent dip in consumer and business sentiment – caused by the government undertaking an extensive corruption investigation - will also likely lead to higher saving rates; consumers and businesses will likely seek to insure themselves from the domestic economic uncertainties of 2026 by putting aside a larger portion of their incomes.

In fact, looking at the national saving rates across the region gives us an interesting perspective. The national saving rate of the Philippines is on the rise, despite the Bangko Sentral ng Pilipinas (BSP) loosening the monetary reins since October 2024.

Thailand’s national saving rate is also on the rise as the country goes through a deleveraging cycle to pay for high household debt (The elephant within, 14 November 2025). On the other hand, the saving rate in Malaysia has been on a downward trend, showcasing how upbeat consumers and businesses are in the economy.

Fiscal muscles

Each economy’s fiscal strength will likely play the largest role in explaining ASEAN’s growth divergence in 2026.

That said, all economies plan to keep their fiscal engines up and running. This will be important if frontloading demand were to pull back since not everyone benefits from strong AI demand.

And HSBC is positive when it comes to Vietnam, Indonesia, Malaysia, and Singapore successfully flexing their fiscal muscles in 2026.

With their public debt-to-GDP ratios low, Vietnam and Indonesia are pumping the fiscal irons in 2026, accruing fiscal deficits that are above their pre-pandemic averages. Vietnam is set to boost its infrastructure spending as it undergoes an expansive reform agenda, with a fiscal deficit-to-GDP target that is slightly above the pre-pandemic levels of c4.1%.

Meanwhile, Indonesia, like in 2025, seeks to crank up its fiscal levers, aiming to accrue a fiscal deficit that is just shy of its mandated fiscal deficit limit of 3.0% of GDP. Doing so will fund the administration’s flagship projects, such as its free meal scheme and infrastructure push. And to ensure this, policymakers delegated the responsibility of attracting investments and fast tracking infrastructure to Danantara. Market participants, however, will likely monitor how effective the free lunch scheme is in boosting consumption and whether Danantara will be an effective lever to crowd in private investment.

Singapore, too, after accumulating a fiscal surplus of about 1.9% of GDP last year, has the fiscal ammunition it needs to support growth, if growth were to falter.

Again, Malaysia and Thailand offer an interesting comparison. Both economies are – in a gradual manner – pulling their fiscal spending back by targeting a lower fiscal deficit-to-GDP ratio than last year, but a deficit that is still above pre-pandemic levels. This is because both economies do not have all the fiscal room to pump up growth; policymakers in Malaysia are slowly bringing public debt-to-GDP down while, based on our estimates, Thailand’s primary balance will need to be positive for debt-to-GDP to be stable.

Both economies, however, will likely differ in outcomes. Malaysia is rationalising its subsidies (by making these targeted) but continues to focus on public investment. This, in 2025, helped crowd-in private investment, leading to Malaysia’s punchy growth performance. On the other hand, Thailand continues to focus on boosting consumption through subsidies such as hand-outs and price controls. However, we think these subsidies last year were ineffective in supporting consumption with high household debt blunting their efficacy.

Lastly, the Philippines will likely see its fiscal muscles take a long break, while the country undertakes an expansive corruption investigation. Though the government projects its fiscal deficit to reach 5.2% of GDP, history has shown us that spending significantly slows for a few years whenever a country undergoes institutional reform, such as in 2013 when corruption allegations led to five years of underspending. HSBC expects the economy’s fiscal deficit to narrow substantially to 3.8% of GDP in 2026 – representing the economy’s largest headwind to growth. This will also imply that public-debt-to GDP ratio will likely fall to 60.6.% in 2026 from c64% in 2025.

Monetary weights

With growth robust for Malaysia, Vietnam, and Singapore, HSBC doesn’t expect monetary policymakers to change their monetary stances. In fact, if inflation were to flare up across the region, these three economies might be the first to tighten their monetary reins (not our base case).

That brings us to the Philippines, Thailand, and Indonesia where HSBC expects the monetary policy to be loosened even further to offset the drag in growth. We think the Philippines and Thailand central banks are at the tail end of their easing cycles while there’s much more to come for Bank Indonesia (BI).

“We expect the Bank of Thailand (BoT) to cut its policy rate by 25bp to 1.00% while we expect the BSP to bring its policy rate down to 4.25% or even deeper if the Fed were to lower policy rates further”, said HSBC.

For Indonesia, its growth-inflation mix continues to give BI more easing space. Inflation remained close to BI’s 2.5% target in 2H2025 despite the recent rise in food inflation. This is because energy prices remained low, while exported disinflation from China helps put a ceiling on core inflation. Following the 150bp in rate cuts, HSBC expects 75bp more in 2026, taking the policy rate to 4.00%. It thinks these cuts will be staggered, across 1Q, 2Q, and 3Q, as BI looks for windows of opportunity when the USD weakens or stabilises.

However, will loosening the monetary reins in 2026 be enough? This will be a matter of monetary transmission and so far, these three countries have found it difficult to translate policy rate cuts into higher credit growth or lower retail rates. Thailand stands out here, with high household debt blunting the efficacy of monetary policy.

Hence, once each central bank’s easing cycle ends, monetary policymakers will likely propose a macroprudential playbook to improve monetary transmission.

The BI has already set the stage, though challenges persist. Last October, the BI started to reduce its SRBI holdings while placing some of its government holdings with banks in the hopes of boosting lending. However, volatility in the USD-IDR has prevented the BI from reducing its SRBI holdings further.

Thailand, too, is doing what it can. Through the ‘Close debt fast, move forward’ policy, the government established asset management companies to buy non-performing loans worth THB 62.4 billion (or 0.3% of GDP) from banks, and offer borrowers the ability to restructure their debt appropriately. If all things go well, the balance sheets of Thai banks would be freed up to lend to more productive firms and households.

The Philippines central bank, on the other hand, will likely mull the possibility of reducing its short-term securities while cutting its RRR (Reserve Requirement Ratio). The BSP Governor in August 2025 mentioned the possibility of reducing its BSP Securities – one of the central bank’s many tools to absorb liquidity – to help support and develop the country’s money market.