How will this change Sri Lanka’s macro-trajectory?

In January 2026, we spoke about Sri Lanka’s fiscal overperformance and external surpluses that would help reserve build up and put the country in a much better footing to absorb any shocks coming its way. Since then, the fundamental macroeconomic story has only gotten stronger outside the war with key domestic macro indicators showing continued positive momentum at the start of the year.

However, given the current situation in the middle east and its effects both on the global and domestic end, we do think there could be contained changes to our previous baseline.

The impacts of the Iran War will be large but with many counterweights as well

The obvious message is that an oil shock is negative onto Sri Lanka - as would a global military situation. Alongside oil, we take a closer look at other areas such as remittances, tourism, local and global demand conditions that could possibly take a hit while we also explore some of the ‘counterweights’ that tied to the current context which can go unnoticed since much of the focus is directed towards the clear negatives. It is really how these factors play against each other that will affect the way the war’s impacts play out onto Sri Lanka.

Three main scenarios amidst the fog of war

With all this uncertainty, we’ve gone through multiple scenarios on top of scenarios - but ultimately ended up on 3 key scenarios – as outlined in our Focus here.

What will the combined impact onto Sri Lanka be?

One way to understand this situation is through the lens of “The new Sri Lanka figuring out how a global conflict affects it”. Given the structurally different macroeconomic setting that Sri Lanka is right now, how domestic economic factors would evolve this time can be VERY different to how they did in the past - and that’s part of why we only think 80% of scenarios are covered through our thinking. Additionally, we recognize that there are other knock-on effects that can complicate this situation – stemming both from the local AND global front – that can take us beyond our 3-scenario expectations.

Right now, while we have put our views into these three scenarios, the developments over the next few weeks can change this. By the end of April, we think there will be enough clarity to rule out at least one of the three scenarios as a result, and we hope to be able to give clearer views at that point.

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Our clients would have already received a detailed report to their emails on this, alongside the numbers we associate with each of these varied scenarios. The full report has also been accessible on our Athena reports platform since the 31st of March, 2026. If you still haven’t had a chance to read through it, click here! If you are yet to be a subscriber, please do get in touch with us for a trial subscription to our reports at clientconnect@frontiergroup.info.

Disclaimer: Information collected/analyzed is from sources believed to be reliable or from the Central Bank/Government. Frontier Research Private Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute our judgment as of the date of the material and are subject to change without notice. The reports and presentations given are not intended as an offer or solicitation for the purchase or sale of any financial instrument. The reader must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned may not be suitable to all investors. This communication including any attachments contained herein is governed and bound by the “Confidentiality and Disclaimer” detailed and available for your specific reference at our corporate website.

Right now, Frontier is working with three scenarios.

1. A Shorter War – This is a scenario where we envision de-escalation within less than a quarter. We think there have been historical occasions where conflicts in the Gulf region have seen high levels of escalation, only to find resolution after some form of a ceasefire. We think this remains a plausible path from here.

2. The Longer War – This is a scenario we think resembles the ongoing situation in Palestine and Lebanon, where conflicts persist without a clear or decisive resolution. Within a scenario like this, hostilities could drag on for an extended period, keeping pressure across global markets and supply chains elevated for much longer than most would anticipate.

3. The Sharper War – This is a scenario where significantly more parties become directly involved, resulting in a major, large-scale, all-out war. However, unlike the Longer War, this scenario may not necessarily persist over an extended period — the sheer intensity of the conflict could, in fact, accelerate its conclusion.

Across these three scenarios, we think the overall impact on both the global economy and the local economy could be broadly different in nature, magnitude, and duration.

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Our clients would have already received a detailed report to their emails on this, alongside the numbers we associate with each of these varied scenarios. The full report has also been accessible on our Athena reports platform since the 31st of March, 2026. If you still haven’t had a chance to read through it, click here! If you are yet to be a subscriber, please do get in touch with us for a trial subscription to our reports at clientconnect@frontiergroup.info.

Disclaimer: Information collected/analyzed is from sources believed to be reliable or from the Central Bank/Government. Frontier Research Private Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute our judgment as of the date of the material and are subject to change without notice. The reports and presentations given are not intended as an offer or solicitation for the purchase or sale of any financial instrument. The reader must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned may not be suitable to all investors. This communication including any attachments contained herein is governed and bound by the “Confidentiality and Disclaimer” detailed and available for your specific reference at our corporate website.

What is at stake to completely reopen the Strait of Hormuz?

Since the February 28^th military attacks on Iran until the Strait of Hormuz (SOH) has been largely closed or severely restricted. This undoubtedly is impacting oil mobilisation therein affecting the supply. Monopolizing on the ultimatums US gives outs coupled with the importance of SOH, Iran has maintained selective, permission-based transit regime since early March. Essentially ships are approved to pass through the SOH on a case-by-case basis after communicating with extensive detail on the vessel ownership to the IRGC in advance. This unequivocally converts the SOH into a geopolitical tool of Iran who will continue to monopolize on the current geopolitical situation, exacerbated by Trump’s ultimatums and threats, while providing leverage to Iran’s allies such as China, Pakistan, India or Russia. Recently, Philippines secured access through the SOH. The ongoing trend shows that any country that is willing to side with Iran and show allegiance is likely to benefit by being given access through SOH, thereby securing oil supply and reducing impact on their local economy. It is likely that Iran continues on the status quo persists and takes control over who gets what and when relating to oil; more specifically isolating western-aligned shipping and rewarding allies.

This does begs the question as to how long Iran can keep up with the threats of US without obliterating their economy. Afterall US has a greater air force capacity than Iran, whose air force equipment are relatively less developed. Iran’s greatest strength regardless of infrastructure shortcoming li in their unconventional warfare methods such as cheap drones and sea mines and in part their geography. Both of these factors taken together makes it harder for the US or others to acquire SOH militarily. This, however, is not perpetual. As of now the US has destroyed most of the Iranian vessels, therefore the ability to enforce a blockade is shrinking due to depletion of physical assets. The next is the economic factor, which is the revenue streams to Iran which is already constrained due to sanctions. If oil exports of Iran (90% of total oil exports) through the Kharg Island is blocked, that would mean a recession level impact on the Iranian economy. All in all, the re-opening of the SOH appears to be contingent on significant resource depletion on the part of Iran and an economic downturn in the US with rising oil prices.

What could the continued rise in global energy prices mean for economies moving forward?

So far, we have seen Brent Crude oil price per barrel exceeding USD 100 and even reaching USD 126. If this selective closure persists, the situation can cloud economic progress and even create the perfect storm for recessions in countries like US and their allies. One way this is already impacting are fertiliser prices and availability as Urea prices have increased by 50% since the start of the war. This snowballs to overall increase in agriculture inputs with LNG disruption affecting planting season in the Northern hemisphere. This will undoubtably impact food prices towards latter part of 2026 and well into 2027. The macroeconomic impact will take flight through high inflation rates which will seep through into interest rates and markets in the long term. This can materialise to some extent regardless of the war ending, however, the recovery of this can be contingent on how soon the war ends. This is likely the greatest impact aside from energy disruption to the world. Secondary impacts include the cost to aviation by extension cargo and tourism. Surging jet fuel costs and closed Iranian and Iraqi airspaces has forced longer reroutes thereby increasing cost for the traveller and the airline therein. While this might not be a long-term impact, it is nonetheless a short-term impact that is causing disruption to countries that are determinant on imports, tourism and other sectors reliant on air travel.

All this points to a likelihood of economic downturns in certain countries. Already the International Energy Agency (IEA) chief has warned that April’s oil supply loss will be double that of March, as pre-war shipments dry up completely. Having already lost 12 million barrels per day the IEA head described this as the largest energy disruption in history, with rationing, inflation and growth slowdowns in emerging economies likely imminent. In the US, recession probability has surged across Wall Street, with Moody’s AI model sitting at 49%, while Goldman Sachs stands at 30% and EY Parthenon at 40%. The Federal Reserve is caught between cutting rates, risking inflation, or hiking. It is evident by now that the war does have a broad based impact from food to aviation to energy which can cumulate to an overall economic recession possibility. The recovery capacity will likely be determined on structural factors of economies such as fiscal stability coupled with structural enablers or barriers in relevant sectors.

How will Sri Lanka be impacted from this?

We are living through the impacts of interrupted oil supply, with rising oil prices to power outages. High cost air travel and shipping can largely impact tourism and exports. However, there are several mechanisms by which Sri Lanka reduces the dire impacts of this. First are the large fiscal buffers from tax revenue – they can act as a sponge to absorb some of the negative impacts of rising prices until and when the geopolitical tension eases. But it does not take away a complete impact of the war. Especially where remittances and tourism are a central source of revenue and foreign exchange to the country.

Second is the potential opportunity Sri Lanka’s Colombo port and even Hambantota port can be as a central point to trade routes instead of a purely transhipment route. This has a possibility given the efforts to expand the capacity via public and private partnerships. There has not been any materialisation of this in a large scale, but it is a possibility, nonetheless.

For decades, investors have treated it as the ultimate safe haven; the asset one relies on when everything else is falling apart. War breaks out? Buy gold. Inflation spikes? Buy gold. Dollar wobbles? Buy gold. When such conditions are absent, gold is of less importance.

That distinction matters enormously right now. The conditions that drove gold’s extraordinary 2025 rally have not just softened but also reversed. To understand why gold is falling now, one must understand how absurdly well it was doing just a moment ago.

Gold’s Big Run

The metal gained 64% in 2025, its strongest annual performance since 1979. The rally was well-founded at its origin: Central banks around the world were cutting rates, bond yields fell across multiple major economies and the dollar was declining. Gold was doing precisely what it was supposed to do under such conditions.

However, soon after gold had ceased to function as a monetary hedge and had begun to function as a momentum trade, not based on its intrinsic qualities but on the assumption that the favourable macroeconomic backdrop would persist indefinitely.

Gold entered 2026 at historically elevated price levels that had, by any conventional measure, already priced in a substantial degree of global risk. When an asset is priced for catastrophe and catastrophe duly arrives, the market reaction is often more muted than expected. The war in the Middle East is serious, but it was not, in a meaningful sense, a surprise to a market that had already spent a year pricing in geopolitical fragmentation. Put simply, gold may not be rising because it had already risen. While this may explain why gold prices have not risen, it does not explain the recent dip. Several factors need to be considered.

The Federal Reserve stalls rate cuts

At the start of 2026, financial markets were operating on a broadly optimistic assumption that the Federal Reserve would cut interest rates twice during the year. Gold is priced in US dollars, the Federal Reserve’s decisions carry a disproportionate weight in determining its global cost and appeal because gold is priced in dollars. When the Fed cuts rates, US bond yields fall and the dollar weakens both of which make gold cheaper for international buyers and less costly to hold relative to interest-bearing alternatives. No other central bank has such levels of influence on gold.

Then came February’s producer price index reading. It is one of the Fed’s early-warning signals for inflation. A reading of +0.7% meant that businesses were paying significantly more than expected, suggesting that inflation was not cooling as anticipated but was, in fact, re-accelerating. If inflation is still running hot, the Fed cannot justify cutting rates. So instead of two cuts, markets are now expecting just one. Some are questioning whether even that single cut would materialise.

The ten-year U.S. Treasury yield climbed back to 4.2%. Simultaneously, bold yields across major world economies also rose. Gold competes with bonds for capital, and when bonds offer more, the opportunity cost of holding gold rises. Institutional investors who had preferred gold because of the rate-cut found no more reason to hold onto gold and adjusted their positions accordingly.

The Dollar Strengthening

It’s hard not to see the irony in this case. The very forces generating anxiety in the Middle East along with the oil supply disruption have simultaneously strengthened the case for holding dollars. In such times, investors tend to seek safety in dollar-denominated assets, which pushes the currency higher. Add to that the prospect of interest rates staying elevated; this means dollar assets are offering better returns thereby becoming more attractive.

This creates a problem for gold. Since the metal is priced in dollars, a stronger currency makes it more expensive for buyers in Asia, Europe, and emerging markets. A Japanese investor or an Indian jeweller pays more in their local currency for the same ounce thereby reducing demand which in turn causes the price to fall. Gold’s safe-haven appeal and the dollar’s safe-haven appeal are, in this respect, in direct competition with each other.

The Oil Shock

The US-Israeli strikes on Iran in late February produced the kind of supply disruption that historically might have sent investors rushing into gold.

The disruption to Gulf oil supplies following the strikes on Iranian infrastructure sent crude prices sharply higher, feeding into the cost of transportation, manufacturing, and food across every major economy. This time around the oil shock has not merely raised prices in the near term, it has also raised the expected persistence of inflation across the global economy, giving central banks in the United States, Europe, and beyond additional justification for keeping monetary policy tighter for longer. The Bank of England cited energy costs explicitly in its most recent hold decision. The ECB flagged similar concerns. These decisions make interest-bearing assets more favourable than gold.

Leveraged Positions

When Iranian tensions first escalated, gold briefly spiked. Physical demand held firm, and premiums in the spot market remained high, suggesting that long-term buyers were not panicking. But the futures market behaved differently.

Leveraged speculators, like other investors, were also caught between a strengthening dollar, and a now hawkish Central Banks had little choice but to sell. Mostly because they needed cash to cover losses elsewhere, and gold was the most liquid asset they held. When they sold, the price dropped. When the price dropped this in turn forced more selling pushing the price further down.

What does this mean for Sri Lanka?

A falling gold price, measured in dollars, might seem like welcome relief for Sri Lankan buyers. But the rupee has weakened marginally against the dollar in the same period, which means that the price of gold in local currency terms has not fallen nearly as much as the international headlines suggest.

At the same time, Sri Lanka’s central bank, which has been carefully rebuilding its foreign reserves, holds a portion of those reserves in gold; a sustained decline in the golds value may put pressure on the reserve position.

For Sri Lankans who borrowed against gold jewellery a falling gold price can reduce the collateral value of those loans.

It is worth being precise about the nature of these risks, none of them are immediate, and most do not materialize unless gold prices continue falling over a sustained period. Pawnbrokers usually have buffers to absorb routine fluctuations, and the Central Bank’s reserve position remains strong. The concerns are likely to only materialize if the current sell-off proves to be the beginning of a prolonged structural decline rather than a cyclical correction.

How have the conflict affected the global stock market?

Since USA’s initial attack on Iran with the “Operation Epic Fury” on 28^th February, Brent Oil Futures which were structurally at considerable low levels during 2025 and early 2026, climbed over 50% high as of last week’s closing price. The closure of the Strait of Hormuz has basically taken one fifth of global oil supply out of the system therefore, reducing global oil supply by an estimate of around 20 million barrels a day.

Apart from the direct effects of a decline in oil and gas, which then affects global trade and freight, creating a second wave of various economic complications, future outlook on oil prices and supply along with the overall escalated conflict of the region is also weighing on the decision of global investors. From the time of the initial attack, Dow Jones has fallen around 7%, S&P 500 by around 5.5% and NASDAQ by 4.5% over the past 3 weeks. Apart from US stocks, here’s how other major global indices have fared as of Friday the 20^th March.

o Shanghai Composite Index fallen by 5%

o Japan Nikkei 225 index fallen by 9%

o India’s Nifty50 fallen by 8%

o Hong Kong’s Hang Seng Index fallen by 5%

o London’s FTSE 100 fallen by 9%

o Europe’s STOXX 600 fallen by 10%

o Australia’s ASX fallen by 8%

With regard to the outlook on global stock markets, strategists from Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. point to case for US stocks to remain intact despite risks posed by the war with Morgan Stanley forecasting bigger negative impact on European and Asian economies due to its higher exposure to fuel costs while U.S. equities could stay relatively less impacted helped by strong energy-sector performance and with global investors shifting to “safer” U.S. assets. At the same time, CGS international said a prolonged war could prompt a 10%-15% contraction in global stocks. overall, there seems to be a conflict in consensus regarding how stock markets would be affected in the short-medium term given the uncertainty on the duration of the conflict and its ramifications.

How are Central Banks reacting to the conflict?

The past week was a decisive week for most central banks, with their scheduled monetary policy decisions. The consensus among most economists prior to February 28^th were for most central banks to go for rate cuts given the falling inflation expectation and weakening job market. However, with volatile global energy prices reigniting inflation fears among most countries, the Bank of England, U.S.’s Federal Reserves, the Bank of Japan along with the Bank of Canada all decided to maintain current rates citing middle east uncertainty. Economists argue that energy price hikes are far more dangerous unlike wage-push inflation which can be balanced by increased productivity. Energy inflation would bring about a cascading effect by raising the cost of production, logistics and transport which could have a longer-term impact to inflation.

Against this backdrop, government bond yields from Britain to Italy and the United States have also experienced a considerable volatility over the past three weeks as a chain reaction from heightened inflation pressure. According to The Guardian, UK’s bond yield have surged to their highest levels since 2008 with growing weight for the BoE to raise rates up to three rates this year while CME FedWatch has increased the probability for the U.S. Federal Reserves to raise benchmark rates by at least 25 bps.

What’s going on with gold and what does USD have to do with this?

Gold, typically seen as a safe-haven at times of global uncertainties is behaving in a contrarian manner with prices recording strong downturns. Prior to the Middles East conflict, Gold surged above $5,300 an ounce extending historic rally as economic and geopolitical uncertainties together with weakened confidence in the U.S. dollar in the early months of 2026. However, with Iran-Israel U.S. war, the prices of gold and other precious metals started a sharp fall despite increased market and geopolitical uncertainties. As of last Friday, Gold Spot fell by nearly 19% with gold trading lower than before the war began.

Two specific factors point to this. One being the relatively stronger U.S. Dollar from before the war began. In fact, the dollar has strengthened against all major currencies, once against regaining its place as a safe-haven asset on the back of oil price surge, which are priced in dollars. Given that relative strength of the U.S. Dollars, it now becomes more expensive for international buyers using other currencies to purchase Gold. Due to this, demand from those buyers have declined considerably and has pushed prices down. At the same time, with rising oil prices driving up global inflation, it becomes more difficult for Central Banks and monetary policy decision makers to go for rate cuts. With investors expecting rates to climb higher than its current levels, gold becomes less attractive due to the lack of an interest return while investments can offer high return especially with the possibility of higher rates becoming more than possible than before.

What the global market reaction to the ME conflict could mean for Sri Lanka?

While Frontier Research has put out few reports on the direct economic implications of the ME conflict to the country’s economy, global market reactions to the situation could also have a number of effects to the economy. Starting off with a relatively stronger USD which could mean some depreciation pressure for emerging market currencies including the LKR and thereby a double shock to the oil bill in addition to the already higher oil prices. CT Smith also warns that potential uptick in inflation could limit the likelihood of a Central Bank policy rate reduction in the near term just as for most global central banks. The Sri Lankan stock market has also reacted and remained quite bearish to the ME conflict with over Rs. 1 trillion being wiped off from the Colombo Stock Market since the conflict began according to Ada Derana.

Sri Lanka’s financial markets have been experiencing modest pressure following the outbreak of Operation Epic Fury in the Gulf region roughly two weeks ago. Despite significant military exchanges and shipping disruptions driving oil prices past USD 100 per barrel, the Sri Lankan rupee has depreciated by only about 0.56%, slightly less than the 0.7% seen during a comparable 12-day conflict last year. This as a relatively contained reaction, particularly if the conflict proves to be short-lived.

A key reason for this resilience is the strong external position Sri Lanka enjoys. Inflation is also expected to remain manageable given that it had been running well below the CBSL’s 5% target prior to the conflict and any upward movement here could be contained.

The topline message for now is that if things do turn quite rapidly as we suggested in our full note, oil prices could snap back pretty quickly too. Alongside that, other fundamental factors encouraging a significant rebound indicate that if resolution comes faster and more decisively than expected, do not rule out a fairly sharp easing on both fronts. In a baseline scenario any costs can be absorbed as well, and in a case where there are costs outside the baseline scenario, we don’t think those will be existential given the strength of the buffers we have outlined.

Our full note covers further details.

Clients with access to Frontier Athena can view the full report at athena.frontiergroup.info. For limited-time access, please contact us at research@frontier.info

As markets are pricing the heightened risk on oil, other commodities and capital flows, this week we find ourselves in a position where few major central banks are also to make their interest rate calls suggesting their outlook on the current context and how they see it impacting domestic economies. Policymakers are expected to price in the disruptions in global supply chains and the consequences to the domestic economy on one hand while factoring in the inflationary expectations that are building up as the war progresses on the other. Will they cut rates with the intention of giving a slight push to the domestic front? Will they hike to counter the expectations around inflation? Or, will they stay put and take a ‘wait and see’ stance? – questions that we’ll have answers to in the upcoming week.

Inflation signals, Job market and the Trump factor

The US Federal Reserve (FED) has maintained a cautious stance during recent months factoring in the inflation trends, labour market developments and risk conditions. At its first meeting of 2026, the US central bank left borrowing costs unchanged, following three consecutive rate cuts implemented late last year. Latest data on labour market front – The Bureau of Labour Statistics earlier this month reported that employers shed 92,000 positions in February as the unemployment rate rose to 4.4% from 4.3% - suggest that a rate cut seems to be on the cards to give a little boost to the slowing domestic economy. There is also the political push coming from the president who has repeatedly advocated for a cut. President Donald Trump demanded last Thursday that the Federal Reserve cut interest rates “immediately,” criticizing Jerome Powell for waiting until the central bank’s next policy meeting.

However, heightened inflation has been a key factor for the FED to not act out immediately. Price increases have remained stubbornly above the FED’s target rate of 2% with the latest data for February indicating 2.4% even BEFORE the Middle Eastern tensions came in to the picture. With visible effects of how US consumers and businesses are feeling the inflationary effects of the war now, analysts are pushing back the possibility of a rate cut to June 2026. The Federal Open Market Committee (FOMC) is expected to announce the next move on Wednesday (March 18^th).

ECB facing the Eurozone test

While market expectations about a rate cut have drastically shifted since the war, whether or not the European Central Bank (ECB) may hike or keep rates unchanged is the conversation going on now. As a region heavily dependent on imported oil and natural gas, surging oil and gas prices has triggered an inflation shock for the ECB. The bank’s decision to resist despite market pressure to raise rates back in 2022 when Russia invaded Ukraine, did not serve the region well and could be a major driver of the rate call this time.

Growth expectations are also revised down with inflationary expectations picking up on the back of rising energy prices. Particularly on Germany, where economists predict a slowdown in growth as tensions continue which could impact the overall growth story of the eurozone. Yes, how long would the war last is a decisive factor to be considered here and a question that no one can give a proper answer to as of yet. What is certain however, is that the ECB is more likely to act faster this time in countering inflationary expectations at an early stage than in 2022.

Bank of England (BOE) also find themselves at a similar spot where expectations have reversed in a matter of days. Just two weeks ago, investors anticipated two quarter-point cuts in 2026, with the first coming as soon as the BoE’s meeting next Thursday. However, given the rising oil prices within the last few days with no signs of the war easing, investors are now betting on the BOE to raise borrowing rates.

Rate decisions across the rest of the world

Similarly, other major global central banks, including all members of the Group of Seven and those representing eight of the world’s ten most-traded currencies, are expected to signal to investors that the risk of a renewed inflation shock is significant enough to warrant a more cautious approach to monetary policy.

For instance. Japan, which relies quite heavily on imported fuel and food could face heavy stress if higher oil prices persist. Furthermore, prolonged weakness of the Yen – which fell on Friday to its lowest level against the dollar since 2024 - could also be a major concern that could quickly translate to domestic inflation and therefore a key area of focus in its interest rate decision.

Bank of Canada, Swiss National Bank, Reserve Bank of Australia, Swedish Central Bank and many other monetary authorities across the East and West are to re-visit their outlooks in the coming week.

What does this mean for Sri Lanka?

The most obvious point for Sri Lanka would be to see how global players are factoring in the possibility of the war being dragged on or not. If authorities are expecting a more prolonged ‘forever in war’ kind of scenario or if they expect this to be more short-lived with massive spikes in oil and other commodities in either way – up or down. As uncertainty, heightened energy prices and rising inflationary expectations are priced in, how investors move from there onwards will be key to look out for. While Sri Lanka’s relatively stable macroeconomic footing to face such crises unlike in previous episodes could present an opportunity to attract investors moving out of the Middle-Eastern region, a prolonged version of disrupted oil supplies undoubtedly, could cause serious damage which may alter the economic narrative both on the global and local front, for reasons beyond our control.

This Week’s Developments

The past week marked a sharp escalation in the conflict, as the United States carried out its largest bombing campaign to date against Iranian military infrastructure in Tehran and Isfahan, prompting retaliatory missile and drone strikes on US bases in Iraq and Syria as well as Israeli cities including Tel Aviv and Haifa. Iran’s response spilled further into the region, with Gulf states such as Dubai, Abu Dhabi, Qatar, Kuwait, and Bahrain hit by drone incursions and missile attacks on strategic infrastructure, such as oil production facilities and airports.

Against this backdrop, President Donald Trump declared that Washington’s objectives extend beyond military action to shaping Iran’s political succession, rejecting the candidacy of Ayatollah Khamenei’s son, Mojtaba, and insisting the United States must be directly involved in deciding the country’s next leader. In contrast, Iranian President Masoud Pezeshkian sought to reassure neighbouring states by announcing that Iran would halt further strikes on Gulf countries, stressing that operations would remain focused on US and Israeli targets unless Gulf territory was used to launch or support attacks against Iran.

What could this mean for the global economy and trade?

The energy shock was the most immediate and visible consequence of the week’s developments. Brent crude’s climb above $93 per barrel marked its highest level in months, driven by fears of supply disruption through the Strait of Hormuz. With nearly one‑fifth of global petroleum shipments passing through this narrow waterway, the withdrawal of insurance coverage for tankers effectively froze traffic, forcing refiners in Asia and Europe to scramble for alternative supplies. In the United States, gasoline prices jumped by more than 10% in a matter of days, adding pressure on households already grappling with elevated living costs. The surge in fuel prices also fed into broader inflationary expectations, with analysts warning that higher transport and production costs could ripple across consumer goods and services worldwide.

Financial markets reflected the turbulence with sharp swings. The Dow Jones Industrial Average fell nearly 800 points mid‑week, erasing billions in market value and underscoring investor anxiety. European and Asian indices also registered losses, though oil majors and energy‑linked stocks gained ground as investors sought refuge in sectors poised to benefit from higher crude prices. Safe‑haven assets surged: gold climbed to multi‑month highs, while currencies such as the Swiss franc and Japanese yen strengthened against the dollar. Emerging market currencies, particularly those of oil‑importing economies, came under pressure as rising import bills threatened to widen current account deficits and weaken exchange rates.

Shipping and logistics were equally strained. With tanker traffic through Hormuz curtailed, freight costs surged as vessels were forced to take longer routes. Container shipping faced delays, disrupting supply chains for goods ranging from electronics to agricultural commodities. Insurance premiums for vessels operating in the region spiked, adding further costs to global trade. The paralysis of one of the world’s most critical maritime chokepoints underscored the vulnerability of supply chains to geopolitical shocks, raising concerns about the resilience of global commerce.

How will Sri Lanka be impacted from this?

Sri Lanka found itself unexpectedly in the spotlight as two Iranian naval vessels became entwined with the unfolding conflict. The first, an Iranian warship, was sunk off Sri Lanka’s southern waters near Galle during US led strikes, with dozens of sailors killed and survivors rescued by the Sri Lankan navy. Just days later, a second Iranian vessel docked in Colombo, carrying more than 200 crew members, including cadets and senior officers. These incidents placed Colombo at the edge of the battlefield, raising both humanitarian and diplomatic challenges as the country coordinated recovery operations while avoiding deeper entanglement in the war.

The government has already warned of fuel and gas price hikes, as disruptions in the Strait of Hormuz threaten to choke supply lines and push up import costs. For a nation heavily reliant on imported petroleum and cooking gas, even modest increases tend to translate quickly into inflationary pressures, for instance, via higher transport fares and electricity bills. The tourism sector, a vital source of foreign exchange, is also under pressure. Airlines have begun rerouting flights to avoid conflict zones, which lengthens travel times and raises ticket prices. These higher costs, combined with global traveler caution, may have led to cancellations and reduced arrivals in Sri Lanka.

With increasingly powerful models and agents at our disposal, the use of AI-powered solutions has also gone up by leaps and bounds. This AI transition is one of the two major technological transitions taking place in the modern world with the other being the sweeping shift to renewable energy sources, particularly solar energy.

Nearly 75% of this capex spending is utilized for AI infrastructure and a significant portion of this is focused on hardware components, data center infrastructure, networking and auxiliary systems. Presently, demand for AI specialized hardware substantially outpaces supply. This structural shift in capital allocation toward hyperscale computing by large hyperscaling companies are also causing second-tier players ramping up cloud capacity to remain relevant.

The AI capex boom has consequently pressurized related commodity prices upwards. Industrial metals and other less obvious materials like silver used in electrical infrastructure are seeing rising demand tied to AI data centres. This demand is only set to increase as power architectures evolve toward higher-voltage systems.

Leading AI firms have seen their valuations climb sharply. Subsequently, investors expect huge payoffs in the short term which now seem increasingly uncertain as some argue the gap between investment expenditure and the actual expectations for future profits have become increasingly wide, as seen by AI revenue falling tremendously short of expectations.

However, there are also reasons to believe that this cycle may differ from past episodes of over-investment. Unlike earlier technological booms, AI is already being deployed at scale across a wide range of industries, with immediate applications, suggesting that at least a portion of the anticipated value is already actualized rather than being purely speculative.

Since we first sent out our Quick Update on the ongoing military conflict in the Middle East, the situation has continued to be quite volatile. Most events since then have been in the direction of escalation, but with enough events that also point towards a quicker resolution being possible. Probably the most alarming of these have been how much oil prices have risen - over USD 100 per barrel on Monday open. The overall situation is simply volatile and it might be near a moment of maximum uncertainty about how this can play out.

With varied reports continuously suggesting increased escalation in the Gulf, how can this moment of uncertainty resolve?

In our previous update, we put forth three broad scenarios.

1. In our first scenario, the conflict lasts for a few weeks at a heightened level but then resolves quickly - before the month is over.

2. In our second scenario, the conflict escalates into a protracted war that lasts for a few months between the primary belligerents - US, Israel, Iran - with others drawn in occasionally.

3. In our third scenario, we had a full-blown regional war that lasts for many months.

In the first few weeks, all three scenarios will look very similar - rapid escalation including strikes outside the main belligerents. Only after this does this clarify towards a resolution, a protracted conflict, or a full-blown regional war.

The way we understand this right now, in any case, these conflicts do remain for an extended period. For Sri Lanka, macroeconomically, this would mean there is a definite ‘shock scenario,’ but given the underlying strength the country has achieved through fiscal and external buffers, it could be an “interruption” to the broader Sri Lankan economic story that has been building up — and the larger the shock, the greater the interruption. Over the next few days, we expect to be conducting far more detailed work on this, particularly given the potential for even a temporary rise in oil prices to have knock-on effects across global financial markets. Should the more adverse scenario of a wider and more protracted war materialise, we will continue to expand our work over the coming weeks in this direction, with the aim of helping clients understand, plan, and navigate what is likely to be an extremely uncertain and challenging operational environment.

What has happened so far?

Whilst the US and Israel continue to justify the war with Iran as a pre-emptive measure, the lack of an imminent threat to rationalize this stance inevitably makes this a war of choice. The socio-political unrest within Iran and the freefall of its economy due to crippling sanctions along with the weakened defenses after the scuffle with Israel has made the nation vulnerable, an opportunity to exploit. The objective of this war, according to the White House is to ‘ensure that Iran does not obtain a nuclear weapon’ and ‘dismantle the Iranian regime’s security apparatus, prioritizing locations that posed an imminent threat’. On the contrary, Iran has repeatedly said its nuclear activities are entirely peaceful. The attacks began at a time when the United States and Iran planned to resume negotiations after consulting their capitals with technical discussions expected to take place during the first week of March after constructive progress was achieved in talks between both nations pertaining to Tehran’s nuclear program in Geneva, though no breakthrough was achieved.

At the present moment, Iran continues to retaliate by attacking Israel and US bases in the region after the killing of the Supreme Leader and around 40 top Iranian officials. Gulf nations affected thus far by attacks from either Iran or Israel include Bahrain, Iraq, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates and most recently Lebanon. Currently, there seems to be no cessation in sight.

The Global Economic Impact

The Strait of Hormuz through which one-fifth of the global oil and LNG shipments travel through from the Middle East mainly towards Asia has unsurprisingly caused anxiety within markets since a complete shutdown of the narrow chokepoint by Iran is well within the realm of possibilities which could result in oil prices surpassing the $100 per barrel mark. However, a more likely scenario is the halting of oil purchase from Iran which could hurt its already shattered markets. This may result in oil prices reaching as high as $80 per barrel. Though Iran supplies oil to China, its production is not critical to global oil consumption as it makes up only less than 3% of the global supply. Presently, given the excess supply of oil available in the global market, apart from the initial spike seen immediately after the attacks in isn’t any short-term pressure for the prices to increase, though a prolonged conflict may result in prices reaching as high as the two scenarios mentioned above. Simultaneously, safe haven assets are expected to move upwards as they usually would during periods of turmoil. The bullish run by gold and silver in 2025 along with safe currencies such as the Swiss Franc can be expected to continue as investors seek to protect their wealth, though once again the extent of this upward trajectory also hinges on the duration of the conflict. Additionally shipping markets have also been disrupted, with tanker movements curtailed and insurance costs rising steeply, further tightening global supply chains.

Economics around the world may experience some degree of increased macroeconomic stress. Sharp spikes in global energy prices have the potential to raise input costs for manufacturers and households alike, feeding into broader inflationary pressures that central banks in the United States, Europe, and Japan may be reluctant to ignore. Higher fuel and transportation costs risk slowing consumer spending and business investment, potentially dampening already fragile growth prospects. Emerging markets in particular may end up bearing the brunt of the financial fallout, as currencies weaken in response to higher oil import costs and capital outflows. Oil-sensitive economies, particularly in Asia and parts of Africa, are experiencing heightened volatility, while Gulf economies face a dual shock of financial outflows and elevated geopolitical risk despite currency pegs.

The global financial markets are undoubtedly experiencing a turbulent period. Recently markets saw steep sell-offs as fears of AI-related disruption towards major businesses continue to threaten investors. In the US alone, this fear has translated to a decline in the Nasdaq Composite (a major stock market index that focuses primarily on tech stocks) by more than 3% in February. The new Iran conflict, the latest blow to the markets can be expected to turn indexes red and keep risk-appetite low, particularly until the trajectory and duration of the conflict can be gauged.

The South Asian Impact

With millions of migrant workers from India, Pakistan, Bangladesh, and Sri Lanka employed across Gulf economies, disruptions caused by retaliatory strikes and infrastructure damage, particularly in central locations such as Abu Dhabi, have already resulted in casualties and raised the possibility of large-scale evacuations. This poses a direct threat to remittance inflows, which are critical for South Asia as they make up a substantial share of GDP in countries like Nepal and Pakistan. A prolonged disruption risks triggering balance-of-payments stress, particularly for smaller and more vulnerable economies.

Higher crude prices are increasing import bills across South Asia, weakening exchange rates and weakening current account positions, while also feeding into domestic inflation through higher fuel and transport costs. At the same time, logistical disruptions from restricted airspace over Iran and the Gulf are increasing transportation and freight costs thereby obstructing export operations. For economies reliant on energy imports and external demand, these developments represent a significant downside risk particularly if the conflict prolongs.

However, on 20^th February 2026, the US Supreme Court ruled by a 6-3 majority against President Donald Trump’s reciprocal tariffs, holding that the International Emergency Economic Powers Act (IEEPA) did not grant the authority he claimed to impose such measures. In response, Trump described the decision as deeply disappointing and announced plans to replace the invalidated measures with a global duty initially set at 10%, which was subsequently increased to 15% under alternative legal authority.

What could this mean for the global economy and trade?

Broadly, these developments could mean that volatility in the global trading system is likely to continue, with several implications for the global economy as well. While the US Supreme Court ruling provides some reassurance to trading partners regarding the limits of the unilateral executive action, President Trump’s rapid replacement of the struck-down tariffs with a 15% global duty under an alternative legal authority signals that policy uncertainty could remain a central concern for all stakeholders.

The ruling also raises potential long term complications for businesses and importers as it did not clarify how the refunds for tariffs already paid should be handled. Recovery of these duties could possibly take several years, leading to prolonged uncertainty and creating a complex legal environment for international trade.

For global trade more broadly, the reinstated tariffs could slow the flow of goods, increase costs for importers and consumers and lead to some sort of supply chain interruptions particularly for export-dependent economies such as China, India and other major US trading partners. Uncertainty over which trade agreements will survive under the new tariff framework may discourage potential investments and long-term strategic planning, while the risk of reciprocal measures or similar unilateral actions by other countries could further undermine the multilateral trading system and fragment global trade networks. Overall, these developments could mean a possible shift away from predictable, rules-based trade toward a more uncertain global environment, with possible negative consequences for economic growth, stability and international cooperation.

How will Sri Lanka be impacted from this?

For Sri Lanka, the US tariff situation carries very direct economic implications as the United States is one of the country’s largest export markets, particularly for garments and textiles. Sri Lankan exporters had previously secured a 20% tariff rate on apparel exports to the US, down from steep reciprocal duties earlier proposed under Trump’s original tariff regime which was seen as a critical concession to maintain competitiveness against regional rivals like Vietnam and Bangladesh.

However, recent developments have disrupted the previously negotiated framework, placing Sri Lankan exporters in an uncertain position. Without a secured bilateral trade deal, Sri Lanka remains sensitive to such unilateral shifts in US policy, as uncertainty over tariff rates could complicate pricing decisions and long‑term contracts with US buyers, who make up for a significant share of Sri Lanka’s export volume. As a result, the current situation highlights the importance of strategic diversification and stronger trade agreements to mitigate the impact of continued US tariff volatility on Sri Lanka’s apparel sector which is a key driver of foreign exchange earnings and employment.

What is the context of “Buy only European” and what does it mean?

The “Buy only European” policy is not entirely new to the global trade environment; in fact, it has been in the talks since last year in the aftermath of Trump’s declaration of reciprocal tariffs. The EU has been working towards greater European sovereignty in 2025 through several key decisions which will be briefly explored below. The fundamental objective is to prioritise EU produced goods and services to the consumers of the region with the aim of boosting the regional economy. What is seen at present is a recurring trend of EU systematically reducing reliance on traditional external partners and simultaneously strengthening regional supply chains.

For example, significant emphasis has been placed on regional and national security by limiting non-EU procurement regulations to disable external entities outside the EU from supplying to the defence sector. In the backdrop of AI and high-tech investments, this could prevent cyber-interventions and allow for stronger security in the region if internal innovations can grow rapidly. Another policy was that in June 2025 the EU commission for the first time, imposed an International Procurement Instrument (IPI) as a response to China effectively excluding EU-made medical devices from Chinese government contracts. The IPI measure restricts large Chinese medical contracts in Europe which means EU is explicitly going after high-value businesses through the IPI policy.

At present, the policy can materialise in other means too. According to Von der Leyen, EU will overall simplify regulations for companies by boosting startups and integrate Europe’s fragmented capital markets while cutting energy prices. It is clear that the direction the EU is simultaneously taking is a re-prioritisation of EU public funds, which could impact voter sentiment and confidence too in the long term alongside the economic benefits for the EU. However, this aggressive policy does not come without its push back, German Chancellor Friedrich Merz has cited the need for a less narrow and aggressive measures such as a “Made with Europe” as opposed to France’s proposal of “Made in Europe”. Nordic countries have cited concerns that this policy could add to greater complexity in EU company regulations. In a joint statement, they urge the commission to focus on “real” simplification such as removing trade barriers between EU countries, merging capital markets, and limiting state aid towards clear market failures.

How the EU commission balances such views by their membership remains to be seen, however, it is unlikely to impact the directional change that the EU is taking, i.e., greater European sovereignty and stronger regionalism.

What could this mean for global trade?

There are unequivocable impacts on many players of global trade which could then lead to geopolitical tensions too. It is likely that this push can disproportionately impact global trade where bigger players will have greater leverage during negotiations whereas smaller players can lose more negotiating leverage because EU is anyways closing themselves off.

There is a strong likelihood for a short-term cost for non-EU countries and a possible benefit for them in the long-term. For instance, local content requirements for tech and defence products through policies such as SAFE, has so far only seen big players such as Canada and UK having some leverage during trade deals. Which means that in the short term there can be an inherent disadvantage towards smaller players looking to enter such markets where demand for these products are high. The compounded impact of inaccessibility to a large market such as the EU in the climate of a tech boom can cause interruptions to returns on investment in non-EU states. In the longer term however, if EU strictly follows this policy, by closing themselves off from external players, there can be a lack of innovative options within the EU which can possibly serve as an opportunity to other countries to build up tech sooner and in a larger scale. This can keep EU in a technological silo and increase global competition which can inadvertently dampen the initial aim of the “Buy only European” policy. Regions such as ASEAN and China which is expanding their high-tech production at a high speed can largely benefit and even scale to the lengths of tech giants of Silicon Valley.

All of this is contingent on the extent the EU is willing go in retaining the Buy only Europe strategy especially when they are highly reliant on non-EU countries for their digital landscape, AND how much of a geopolitical and global trade pressure is being built up by US and China. Europe will likely be pressured by their own membership to consider the incentives of balancing protectionist measures and opening their markets, against the backdrop of high-tech and industrial developments globally.

How will Sri Lanka be impacted from this?

Broadly the impact on Sri Lanka does not appear to be direct and significant yet. EU has not specifically targeted consumer sectors that Sri Lanka has integrated itself into such as traditional exports and commercial export products namely, Tea, Rubber, and textiles and other consumer goods which the EU is highly relying on. But if GSP+ is affected through the “Buy only European” policy, this could then directly impact key exports of Sri Lanka to the EU, which therein impacts income growth to the country. So far there has not been clarity on this possibility, the emphasis has been greater on strengthening national security, technology and digital landscape. All of which is largely supplied by the US and China and some other bigger players who will cut the bigger losses.

However, the story on regionalism and stronger ASEAN and China can materialise in Sri Lanka IF the EU strengthens their protectionist policies. This can even strengthen the case for more low-tech manufacturing activity to trickle down to Sri Lanka while ASEAN and China take on high-tech manufacturing. The lack of integration of Sri Lanka in the global markets during such a protectionist backdrop can act as an advantage in the long term. Nonetheless, if Sri Lanka does integrate into global manufacturing in IT, medical services, and electronics, stricter eligibility rules of EU can directly impact how Sri Lanka can do business there.

The world woke up last Monday to yet another announcement on Trump’s Truth Social Media platform on what he referred to as a “trade deal” between India and the US to reduce the market barriers between two of the biggest economies in the world by the US reducing trade tariffs of Indian goods from 50 to 18 percent with India agreeing to stop purchasing Russian oil and reducing India’s tariff on the US goods to zero altogether. This announcement came just a week after the historic “mother of all deals” between India and the EU that set out to create the world’s largest free trade zone encompassing two billion people and nearly 25% of global gross domestic product.

While both deals feel like a “pat on the back” for India in the race of international trade at a time of global geopolitical uncertainties, there still looms a cloud of doubt on the exact details of the US-India trade deal and its repercussion to the rest of US’s trading partners.

The devil is in the details

As a part of Trump’s plan to reduce its trade deficit with its trading partner, the US imposed a 25% tariff on Indian goods earlier last year which then doubled with an additional 25% in August as punishment for buying Russian oil. While India has been through few rounds of discussion throughout the past year on bringing down the tariff rate, Indian markets did not expect a trade deal that let US get the better end of the deal with India.

While the Trump claims that through the deal, India’s Tariff and Non-Tariff Barriers against the US to come down to zero, India committing to “BUY AMERICAN” products including US Energy, Technology, Agriculture and Coal and for India to completely stop purchasing the discounted Russian oil, Modi’s statement on X did not share the same clauses of the agreement. He completely avoided mentioning any word of “trade deal”, the agreement to stop purchasing Russian oil and the commitment to buy $500bn worth of US goods but simply confirming that “Made in India products will now have a reduced tariff of 18%”.

Given that the formal deal will only be singed in March, there could be further discussion on some of the smaller details of the agreement. However, the sentiment across India and its market is not one of celebration with analysts and politicians commenting on the concerning nature of the deal.

What do these deals mean for India?

India had a number of trade related issues including a rising trade gap, a falling rupee and an outflow of foreign money from the country last year with tariff related uncertainties being one of the root causes of them. It was also struggling with its competing trading peers including Vietnam, Thailand and Bangladesh that had relatively lower tariff on their goods to the US. If the deal does go through it would mean that many Indian exporting goods including Electrical machinery parts, pharmaceutical products, mechanical appliances and parts, textile related products and other top Indian exports to the US would now have a fighting chance with some of its competitive peers. It could also boost India appeal as an alternative to China in many other exporting products. With the EU-India trade deal also reducing 99.5% of tariff on Indian goods, the South Asian country that exports around €109bn worth of exports to the EU region (2024), could double their exports in a just a few years.

However, Agriculture has once again come to the forefront of India’s local economic discussions with Washington demanding New Delhi to open its markets for imports according to Trump’s announcement on the trade deal. Given almost half of India’s 1.4bn population still being reliant on the sector to earn a living, the country and specifically Modi, to whom the sector has been a sore point since he came to power in 2014, would have to navigate its way more carefully giving the welfare of its farmers the highest priority.

What does this mean for Sri Lanka and its peers?

If and when the deal materializes, the revised 18% tariff would put India in a more advantageous position within the US tariff framework in comparison to many Asian countries including Sri Lanka that currently has a 20% tariff on its export to the US. Given that India already produces and exports many competing goods that Sri Lanka exports to the US, the market would definitely favour India which could put Sri Lankan exports to the US in a losing battle. This could mean that Indian products especially in the Garment and textile industry could possibly see higher demand given the lower price point in comparison to Sri Lankan exports.

This complication applies for many other Southeast and South Asian economies like Vietnam, Bangladesh, Pakistan, Malaysia and Thailand that exports similar products. However, whether or not these competitive advantages would apply for Indian exports would depend on if the new tariff deal materializes, whether both countries would stick to the clauses laid out by the agreement including India’s promise to stop purchasing Russian oil and if other peers including Sri Lanka is able to renegotiate further tariff reductions with the US on their exports.

The January 2026 edition of our monthly, ‘The Lion Defiant’ focuses on how the Sri Lankan economy despite having faced two massive shocks in 2025 remained quite strong. We think this strength is likely to continue ahead and even be enough to buffer against further shocks if they arise.

Cyclone Ditwah has undoubtedly resulted in a humanitarian crisis from which the nation still continues to recover. However, while there is a lot more to do to cover the actual damage on the ground and the spending required to alleviate the impact of this shock, we think that these early indications show that it will be possible without dramatic economic consequences. During this same period, more significant to us was the “hidden shock” of 2025 - the large amount of missing multilateral money in the middle of the year which led to Sri Lanka recording massive net outflows. In the second and third quarter, we probably saw some of the biggest net outflows in two consecutive quarters in modern Sri Lankan history – around USD 1.5 bn flowing out on net basis. Sri Lanka only experienced around 5.5% depreciation in 2025 despite such massive outflows.

We think these shocks were handled by extremely strong fiscal performance, exceedingly resilient external performance, low inflation pressures, and a robust private-sector driven growth engine is what we see as driving Sri Lanka’s story.

Going forward beyond 2026 we see these as structural and fundamental changes in the Sri Lankan economy as opposed to being driven by temporary factors. As a result, we think these continue to be major drivers of the underlying economic story for the next few years as well which could result in a very strong macroeconomic foundation, but where both local and especially global volatilities still act as interruptions that prevent the full materialization of this story.

For those interested in the key data points on Sri Lanka’s macroeconomic developments, the final section provides the latest on the trade balance, current account balance, reserves, exchange rate, interest rates, and inflation – including our forecast on CCPI inflation up to end-2027.

Our clients would have received the report to their emails and is accessible on our Athena reports platform since the 26^th of January, 2026. If you still haven’t had a chance to read through click here! If not, please get in touch with us for a trial subscription to our reports (clientconnect@frontiergroup.info).

• A broad-based increase in longer-term asset performance - both fixed-income and equity - is the most likely way that we see this story materializing. However, existing areas that are being driven by government-led cash flows and struggle to transition to private sector-led cash flows can still underperform relative to overall performance. Elevated risk levels as a result of geopolitical uncertainty, debt levels and climate exposure can also add to the risk premium in the region. Different exposures to these transitions and risks create slightly different performance across the different South Asian market conditions in our view.

• The overall economic story on South Asia - where domestic consumption continues strongly but some investment growth is supported by foreign inflows - is part of our broad expectation as well. However, we do feel that domestic consumption gets supported by greater domestic financial market development compared to the past, which compensates for the transition costs of moving away gradually from deficit-funded consumption in the short term. Some deficit-funded consumption still likely remains a factor, especially if portfolio inflows into the region and into emerging markets as a whole remain buoyant.

• Financial market development driven by better macroeconomic performance, greater economic formalization, and shifting demographics is a big part of why we think domestic market developments are likely to come into play. While this creates new growth drivers on the ground, we think that the availability of wider and deeper financial assets can be significant enough to affect the overall market opportunities across the South Asian region.

• The two chief risks to this outlook are if a single South Asian economy significantly overperforms the rest (i.e. one investing in a diversified South Asian portfolio will then see lower gains), or if overall economic performance within South Asian markets turns weak across the board. While an aggressive investor might be able to take a bet on any single country, we think relatively high-risk levels makes a more diversified play prudent enough. The most likely context where a single South Asian economy overperforms, probably results in some amount of positive performance in the other South Asian economies as well. The context where overall market conditions weaken will probably also result in a diversified approach being relatively safer than a context where one individual country’s markets could underperform even more compared to the rest.

Disclaimer: Information collected/analyzed is from sources believed to be reliable or from the Central Bank/Government. Frontier Research Private Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute our judgment as of the date of the material and are subject to change without notice. The reports and presentations given are not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned may not be suitable to all investors.

A central question we examine in the webinar: Is South Asia emerging as a cohesive economic region, or is there more to go for these economic stories to align? The session also featured a panel discussion with Nitesh Jain (CareEdge Global) and Sumedha Das Gupta (Economist Intelligence: EIU), offering diverse perspectives on where the South Asian story could lead in the years ahead.

Watch the full webinar here on Substack.

Art of the Deal: Polar Edition

Ever since Trump’s re-election, his desire to own Greenland has been at the forefront of the agenda, threatening the freedom heralded by the Greenland’s national anthem. Over the past few weeks, this obsessiveness has only increased even to the point of risking military confrontation between NATO states. This push stems from a mix of legitimate strategic arguments and exaggerated or politically charged rhetoric. The short-term market impact has been visible, and long-term implications, especially if formal agreements were to be signed has the potential to restructure supply chains and geopolitical alignments.

Why does the U.S want Greenland?

Donald Trump has repeatedly framed Greenland as essential for U.S. national security, especially due to its geographical position in the Arctic. Greenland sits between North America and Europe, adjacent to the North Atlantic and Arctic shipping lanes, and above the shortest flight (and ballistic missile) path between the U.S. and Russia. Control of Greenland would enhance the U.S.’s capability to monitor Arctic activities, and support missile defense systems through advanced radar coverage. However, it must be noted that the US already has widespread military access across Greenland, made possible by a Cold War agreement signed in 1951 and amended in 2004. The U.S. already operates Pituffik Space Base (Thule Air Base) in northwest Greenland, which supports missile warning and space tracking systems.

Moreover, as climate change continues to melt the Arctic ice, new shipping corridors are opening up such as the Northwest Passage and Transpolar Sea Route. These could shorten trade routes between Asia and Europe, reducing reliance on chokepoints like the Suez Canal. Greenland’s position is crucial for future supply chain infrastructure and monitoring of these routes.

Greenland also contains significant deposits of rare earth minerals and critical elements, including uranium, graphite, and others essential for high-tech, renewable energy, and defense industries. These are strategically important in global supply chains, especially as the U.S. seek to diversify away from reliance on China’s dominant role in rare earth processing. However, mining remains extremely difficult due to climate, terrain, and infrastructure limitations; existing projects are limited, and long-term commercial viability is uncertain.

Beyond strategic rationale, Trump’s public statements often mix strategic language with personal or political rhetoric, including linking his renewed push to not receiving the Nobel Peace Prize, framing the issue as part of a global security mission, or casting rivals China and Russia as urgent threats.

Are these reasons valid?

It is true that Greenland is strategically important, given Arctic geopolitics and missile routes. The U.S. and NATO already consider Arctic security a priority in managing Russian and Chinese activity.

However, claiming only the U.S. can secure Greenland may be misleading. The existing U.S.-Denmark defense arrangements allow for military presence without transferring sovereignty. Experts argue that expanding cooperation under current alliances would address security needs far more effectively than forcing a transfer of sovereignty.

While Greenland is rich in potential mineral resources, most deposits are untapped and commercially unviable without massive investment. Many deposits are legally constrained, and environmental considerations are strong. The infrastructure costs and harsh operating conditions mean Greenland’s resource wealth may not be a short-term economic windfall.

Pressuring a NATO ally with tariffs to force a territorial sale challenges fundamental principles of international law and sovereignty. This led to widespread diplomatic criticism, even among some European right-wing parties, and increased calls for EU strategic autonomy.

Economic impact of current volatility

Trump’s tariff threats tied to Greenland, including possible 10-25% duties on imports from eight European countries has already pushed markets down. Stock markets dropped sharply in Europe and the U.S. as investors feared a new transatlantic trade conflict, the price of gold, a safe haven asset, set a new record and currencies like the Swiss franc, another safe haven, strengthened as risk aversion increased. The International Monetary Fund warned that such tariff escalations could trigger a “spiral of escalation” hurting global growth and investment decisions.

The threat also contributed to uncertainty in global trade flows and caused the EU to pause a major U.S.-EU trade deal, delaying economic integration. Analysts note that even modest tariffs could have measurable impacts on GDP, potentially reducing growth in affected European economies by 0.1 to 0.5% though the political fallout often outweighs the direct economic effects.

Economic impact IF a Greenland deal goes through

A hypothetical formal transfer of Greenland to U.S. control, which is currently not part of the known framework agreed with NATO and Denmark, would have long-term, far-reaching economic effects.

If the U.S. secured exclusive rights to Greenland’s strategic resources and Arctic infrastructure, it could, strengthen critical mineral supply chains and reduce reliance on foreign sources whilst also enhance U.S. presence in emerging Arctic shipping and logistics. This could support industries such as defense, renewable tech, and advanced manufacturing, but only over decades and with high upfront investment costs.

On the other hand, Greenland’s economy which is currently dominated by fishing and aid from Denmark may be set to experience a major shift in control or investment which in turn could also change the underlying economic structure, but risks include environmental degradation and social disruption as citizens strongly oppose U.S control.

What does this mean for Sri Lanka?

While geographically distant from the Arctic, Sri Lanka may face indirect consequences. Heightened geopolitical tensions and tariff risks can feed into global trade uncertainty. Volatility in shipping and commodity markets can indirectly affect Sri Lanka’s import prices, though the Greenland issue alone is unlikely to be a primary driver.

What could this mean for Iran’s economy going forward?

Looking ahead, Iran’s economic outlook is likely to remain highly constrained, even if the current unrest subsides. In the near term, persistent protests, internet disruptions, and tighter enforcement of sanctions will continue to weigh on already fragile economic activity. Business operations, retail trade, logistics, and services have been disrupted, while capital flight pressures have intensified as confidence in the currency and banking system weakens further.

Inflation is likely to remain elevated. The sharp depreciation of the rial raises import costs across food, fuel, and medicine, while sanctions limit the authorities’ ability to stabilize prices through trade or financial channels. At the same time, fiscal space is narrowing. Government revenues remain heavily dependent on oil exports, yet sanctions, storage bottlenecks, and payment frictions restrict Iran’s ability to fully monetize production. This raises the risk that deficits could be increasingly financed through money creation, which yet again creates potential inflationary pressures.

Over the medium term, the combination of sanctions, policy uncertainty, and political risk is likely to suppress investment and productivity growth. Even sectors that have adapted to sanctions such as energy, petrochemicals, and basic manufacturing face rising costs, limited access to technology, and restricted export markets.

What could this mean for the global economy?

For the global economy, Iran’s turmoil points mostly to higher costs and added volatility in commodity prices including oil prices, not an immediate supply shortfall. Iran-related tensions also push up war-risk insurance and freight through the Strait of Hormuz, making delivered fuel more expensive and adding a mild inflation push, even as overall supply largely remains in the market.

The standout development from this situation in Iran is how quickly Iranian oil has piled up at sea: equivalent to roughly 50 days of production (around 166 million barrels in the week ended 11^th January 2026). This could be most likely due to slower Chinese buying under sanction pressure, quota limits and high inventories. In 2025 itself, China has bought around 80% of Iran’s shipped crude via independent refiners. Chinese purchases have slowed down due to sanctions. Fresh US sanctions in January have added more friction for buyers, making it slower to move these barrels.

What does this mean for South Asia?

For South Asia, Iran’s crisis mainly shows up as more expensive and less predictable energy supply – rather than outright shortages, much like the global picture. After China, many countries in the South Asian region import a large share of their oil and gas from the Gulf and almost moves all of that through the Strait of Hormuz. When Iran-related tensions push up insurance and freight costs, South Asian refiners and power utilities end up paying more for each barrel, which can add pressure on inflation, budgets and currency stability. This could be adversely affected further, in a scenario where the Iranian oil supply remains in storage and Chinese demand stays uneven. Higher shipping and insurance bills also raise transport and trade costs more broadly, acting as a small drag on growth for energy-importing economies such as India, Pakistan, Bangladesh and Sri Lanka.