A wave of impending aid cuts is set to hit the region hard

A wave of impending aid cuts is set to hit the region hard

Southeast Asia finds itself at an uncertain moment in its development trajectory. The region’s highly successful export-driven economic model is at risk as the Trump administration looks to dramatically reshape the global trade order, with Southeast Asia potentially facing especially punitive US tariffs. At the same time, official development finance (ODF) to the region — encompassing traditional aid, such as grants and concessional loans (ODA), as well as other official flows (OOF) from foreign governments and multilateral bodies — is set to decrease as major Western donors cut back on foreign aid.

This third edition of the Southeast Asia Aid Map shows total ODF in 2023 grew modestly (the latest full year of reporting) to reach $29 billion — up from $26.5 billion in the previous year but well below the pre-pandemic average of $33 billion. This year-on-year uptick in ODF was largely driven by increased non-concessional loans from the region’s largest development partners. China ramped up disbursements by almost 50%, with an acceleration in the implementation of key infrastructure projects such as the Jakarta–Bandung High-Speed Rail in Indonesia and the East Coast Rail Link in Malaysia. The World Bank and Asian Development Bank also increased their disbursements, providing substantial budget support to the region’s major economies in the wake of the Covid-19 pandemic.

However, aid cuts by major Western donors are expected to see total ODF inflows decline in coming years. In 2024, seven European governments (France, Germany, the Netherlands, Sweden, Finland, Austria, and Italy) and the European Union announced $17.2 billion in foreign aid (ODA) cuts to be implemented between 2025 and 2029. Even more drastic has been the Trump administration’s decision to halt around $60 billion in ODA — most of the United States’ overseas aid program — beginning in early 2025. The United Kingdom followed suit, announcing reductions in annual ODA of around $7.6 billion, as it redirected government funding towards defence.

Based on recent announcements, this report projects total ODF to Southeast Asia will fall by more than $2 billion, back to about $26.5 billion by 2026. Driving this is a 20% expected reduction in bilateral aid to the region, which is projected to decline from about $11 billion in 2023 to $9 billion in 2026. Poorer countries and social sector priorities such as health, education, and civil society support that rely on bilateral aid funding are likely to lose out the most.

Aid cuts will deepen a pre-existing development divide. Southeast Asia’s higher income countries are already capturing the lion’s share of international ODF, while lower income nations such as Timor-Leste, Cambodia, Laos, and Myanmar that rely more heavily on grants and concessional loans are being left behind despite rising poverty in these countries in recent years. If the current trajectory continues, especially amid Western aid cuts, this divide will become more entrenched, undermining the region’s long-term stability, equity, and resilience.

Whereas geopolitical competition at least promised higher development financing to countries in the region, the impending reduction in development support risks leaving many important sustainable development priorities even more underfunded. Across the region, ODF plays a key role in funding infrastructure, climate action, humanitarian relief, civil society support, gender equality, and disability inclusion. But despite substantial economic development over decades across most of Southeast Asia, about 13% or some 86 million people in the region still live on less than $3.65 per day.

The centre of gravity in Southeast Asia’s development finance landscape looks set to drift East, notably to Beijing but also Tokyo and Seoul. This comes after several years in which Western donors had shored up their role as development partners to the region, especially as China’s ODF contracted from its earlier highs.

Combined with potentially weakening trade ties with the United States, Southeast Asian countries risk finding themselves with fewer alternatives to support their development. Even as the infrastructure race slows, China’s relative importance as a development actor in the region will rise as Western development support recedes. Beijing retains a substantial pipeline of infrastructure projects and has shown continued appetite to take on major projects. In 2023, there was a fourfold increase in Chinese infrastructure project commitments — from a low of $2.5 billion in 2022 to almost $10 billion the following year — due to the revival of the Kyaukphyu Deep Sea Port project in Myanmar.

By contrast, Western alternative infrastructure offerings have effectively failed to materialise in recent years. Similarly, Western promises to support the region’s clean energy transition have yet to translate into more projects on the ground — of global concern given coal-dependent Southeast Asia is a major source of rapidly growing carbon emissions.

Despite a negative outlook, there are some important positive trends to be found in the data: a growing share of ODF incorporates climate change, gender equality, and disability inclusion objectives. A critical question is how the Trump administration will approach and seek to influence the agendas of the multilateral development banks, which have led the way thus far on climate and social inclusion objectives in regional development.