The 2026 September Monthly report – Be ready for things to change – dives deeper on to this story of triggers materializing and what it means in the short-term, alongside the structural features of Sri Lanka’s long term macroeconomic transformation that we see unfolding progressively. We take a closer look at the most recent credit rating upgrade Sri Lanka received, the movements in oil prices over the past few weeks and how these fit within the overall picture we have for the Sri Lankan economy.

We believe that underneath these short-term developments, more structural drivers are slowly re-shaping Sri Lanka’s long term economic trajectory that is quite different to the more known, up-down cycles in the past. While this months’ Focus elaborates the numbers – our updated fiscal, external, and credit forecasts – here, we explore the ways in which these new drivers may work together to cause some form of “reallocation” within the economy, how one could use the existing moment of safety to “position” themselves for a new Sri Lanka and the costs surrounding this point of transition.

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.

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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.

On the fiscal front, despite the biggest oil shock in a generation, Sri Lanka continues to show strong revenue collection and contained government expenditure despite some level of spending coming through. Similar to the past two years, this has given rise to healthy fiscal surpluses so far during the year and could potentially continue to be a recurring feature in Sri Lanka’s fiscal landscape. We dive deeper into our detailed explanations covering the different drivers across both, revenue and expenditure items that we see are structurally changing.

On the external front, we explore the impact on oil prices onto our import bill for 2026 and 2027 alongside the rest in the trade account, while also covering the services account of the Balance of Payments with a particular focus on Tourism, and Remittances which are two of the main drivers of Sri Lanka’s external sector performance. We also look at our broad outlook on external debt repayments, reserve accumulation, other drivers of the current account and look at private sector credit activity before giving the breakdown of our external forecasts for end-26 and 27.

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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 25^th September 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.

The ‘vicious cycle’

According to the latest figures posted by the Institute of International Finance (IIF), global debt rose more than USD 10 trillion in the first half of 2026, raising the total debt stock to USD 365.5 trillion by end June 2026 – a historic high. Unlike previous episodes of rising debt – Global Financial Crisis in 2008 or the Covid-19 pandemic – the problem this time around is that borrowing costs are not that cheap.

What we see right now is that as state debts continue to rise, so do yields on government bonds, reflecting the growing investor discomfort stemming from high rates, rising costs, slow growth and high fiscal spending. The worlds’ biggest economies – including in the U.S., Japan, France and the U.K – recently hit the highest yields on their long-term bonds in more than a decade!

As yields on benchmark assets such as US Treasuries rise, borrowing costs for businesses, households, and governments will also increase. Add on the rising cost of oil onto this that could potentially hike inflation further from this point – this could force central banks to maintain monetary policy tightness causing emerging markets to make a difficult choice between raising interest rates to retain capital or risking further capital outflows.

The IIF has warned that governments could become trapped in a ‘vicious cycle’, where persistent fiscal deficits cause further borrowing, while rising interest payments increasingly limit their ability to bring down those deficits.

Warning signs issued

The head of the International Monetary Fund – Kristalina Georgieva - has urged major economies to exercise greater fiscal discipline as rising bond yields place increasing pressure on government budgets. The IMF says public debt is at the highest level since World War Two and is projected to exceed 100% of GDP before 2030, signaling out advanced economies, led by the United States, as the “worst offenders” ‌on debt loads, ⁠with debt-to-GDP ratios higher than emerging markets and low-income countries.

At a more institutional level, The Financial Stability Board (FSB) - the global body that monitors risks to the financial system – have identified some countries that are unprepared for bank failures, if at all one is to take place. A review of 19 jurisdictions found that many countries remain inadequately prepared to support financial stability during major banking crises, nearly two decades after the 2008 financial crisis. The FSB highlighted that several governments have yet to implement critical mechanisms needed to manage large bank failures. Only Hong Kong, Japan, the US and UK were found to be fully compliant with its requirements, while India and Argentina were classified as non-compliant. The EU banking union and Switzerland were among those deemed materially non-compliant.

The add-on of AI worries

Then there are the booming AI companies that are re-shaping the way global debt markets work – companies that are borrowing trillions of dollars despite high interest rates. In 2026, the volume of U.S. corporate bond issuance has already reached $1.69 trillion, Bloomberg reports. These giants are borrowing trillions and are counting on substantial future profits. For instance, OpenAI expects its annual revenue to reach at least USD 70 billion by the end of the year while investors fear that the market will struggle to absorb such a volume of new debt obligations.

Experts caution that heavy borrowing by technology firms could push up financing costs for other businesses. This pressure may already be weighing on corporate borrowing, with U.S. companies issuing just USD 11.4 billion in bonds last week, well below the expected USD 25-30 billion, suggesting that traditional borrowers are becoming more cautious.

What does it mean for Sri Lanka?

Despite debt figures across the world continuing to rise, it does not immediately signal an outright financial crisis. As Sri Lanka continues on its re-building path by maintaining strong fiscal performance and settling its dues both on the domestic and external front, the journey ahead seems quite manageable. Even with regards to the ongoing IMF program and the related debt indicators, Sri Lanka seems to be well on track to hit the targets over the next few years.

Over the medium to long term, how governments navigate this rising debt burden will have important implications for global interest rates, exchange rates, trade and capital flows. This is particularly relevant for Sri Lanka, which is seeking to accelerate growth following a period of economic stabilization. Opening up to foreign capital and expanding trade with the rest of the world remain key to this effort. However, sustaining growth momentum must go hand in hand with maintaining strong liquidity buffers, adequate foreign exchange reserves and sufficient safeguards to absorb potential losses arising from future crises.

Why is diesel suddenly the problem?

The current energy shock is unusual as crude oil and refined fuel markets are experiencing different levels of stress. While some Middle Eastern crude exports have begun recovering, refined-product supplies remain much tighter. Europe, in particular, has become increasingly dependent on imports to supplement domestic diesel production, while disruptions to Russian and Middle Eastern supplies have reduced available volumes. The US has also been facing a diesel shortage with inventories falling to around 107.9 million barrels in September, the lowest in more than four decades,. Global diesel prices hit a record high last Friday with average price for a gallon (3.79 litres) of diesel rising to $6.50.

This has created pressure for governments to act now. Earlier last week, US president Donald Trump threatened to restrict diesel exports to Europe unless European countries released more of their strategic stocks. Such a move could have helped US consumers in the short term but would have further tightened European supplies. However, the release is not a permanent solution. The International Energy Agency had already committed to releasing 400 million barrels of emergency stocks earlier this year, with around two-thirds reportedly released by the end of September. This means governments are increasingly using emergency inventories to compensate for disruptions that have not yet been resolved.

Will the release actually bring prices down?

The immediate market reaction suggests investors believe the release will provide some relief, although expectations remain limited. European diesel futures fell sharply following news of the agreement, while US diesel futures also declined. Brent crude briefly moved below USD 100 per barrel before recovering back to USD 102, suggesting that markets do not view the release as sufficient to eliminate the broader supply risk.

There are also limits to what strategic reserves can achieve. Emergency stocks can temporarily replace barrels that are unavailable, but they cannot permanently compensate for disrupted production or shipping routes. If the Strait of Hormuz remains constrained or Russian refinery disruptions continue, the additional supply could simply delay rather than resolve the shortage. The G7 is therefore buying time for the market. The longer-term solution still depends on the normalisation of global energy flows and increased refinery output. S&P Global described the move as a temporary measure against a much deeper supply problem, noting that it does not resolve the underlying tightness in global markets.

What does this mean for Sri Lanka?

With Sri Lanka already absorbing a substantial increase in its fuel import bill, the G7 announcement is highly relevant. The country has spent approximately USD 4.0 billion on fuel imports during January–August 2026, a 61.6% increase from the same period last year. A sustained easing in international diesel prices could therefore provide relief on two fronts. First, it would reduce the foreign exchange required to finance fuel imports. Second, it could reduce pressure on transport costs, helping to contain the pass-through of energy prices into overall inflation.

For Sri Lanka, the G7 release is therefore a positive short-term development, but the bigger benefit would come from a sustained normalisation of global diesel prices rather than temporary reserve releases. This is especially relevant given the country’s recent dependance on refined oil for consumption and production needs.

The need for a durable solution

The current truce between Beijing and Washington which unveiled in October last year, brought some level of relief from absurdly high tariffs alongside the agreement to suspend rare-earth curbs and continued purchase of US Soybeans by China. A Congressional Research Service report in July 2026 noted that Chinese goods exported to the US still face tariffs of 36.5 percent, while US goods entering China are taxed at 31 percent.

Given the current context, it is clear that any escalation from this point onwards is just too costly for both sides. While increased costs and inflation have been major concerns so far, any higher tariffs from this will squeeze margins and raise prices, dampening consumer confidence further. With mid-term elections round the corner, rising prices from current levels will only hurt any prospect of gaining votes.

And then, there’s the largely unpopular Iran war which has raised the country’s debt stock to a historic high of USD 40 Trillion! A truce collapse and any inflationary shock will only add on to this bloating debt load and limited fiscal space, putting consumers and the general economy at risk.

China too, finds itself at a crucial juncture with a number of structural issues weighing heavily on its economy with any escalation carrying sizeable costs for its participants. Weak domestic demand, sanctions on buyers of Russian oil, tensions over Taiwan and tighter measures from its major trading partners – particularly the EU – against the large surpluses run by Beijing, could trigger additional costs, dampening the economic landscape of the manufacturing giant.

However, one area the truce does not seem to slow down is the rapidly evolving AI race. While US Treasury Secretary has said that both sides had agreed to launch a communications “hotline” for notifying each other about AI safety incidents, analysts expect cooperation to remain low due to a lack of mutual trust on the technology and because neither side has expressed serious interest in slowing down development. What this means in terms of company valuations and the financial risk that runs alongside, remains unclear to predict.

How have markets reacted so far?

While markets have reacted in mix ways, the truce, for the most part, is viewed as merely a delay in progress. With prospects for a longer-term extension still unclear, China’s benchmark CSI 300 Index fell 1.3% last Thursday. Meanwhile, companies positioning themselves as alternatives to China’s dominance in the rare earths supply chain saw their shares drop, as the extension of the truce gives more room for negotiations over access to these critical minerals used in modern technologies.

Asian stocks were also seen split as markets moved to react to other forces stemming from higher interest rates, easing energy prices and rising US bond rates while investors continued to price in higher levels of uncertainty despite the announcement of the truce.

In a broad sense, mixed market movements show that while the extension of the truce signals limited policy shock in the near term, it has not indicated any prospect of future growth or certainty for investors to make longer-term bets.

What does this mean for Sri Lanka?

In terms of trade, the truce does bring some level of ‘stability’ to exporters, importers and those connected to US-China supply chains for the rest of 2026, giving more time to continue operations and amplify any diversification efforts in the meantime. While any escalation from this point onwards is mostly out of the picture right now and any concrete and durable agreement also seems to be out of reach. While the hope for a longer-term deal does exist, depending on the specifics that are expected to come about within the next few months, more short-term fixes like this can be expected even beyond 2027, as long as both parties try to enter into a deal that prioritizes what each of them want.

From a markets’ perspective, given that Sri Lanka has now received a credit rating upgrade and has shown promising progress in terms of fiscal performance over the past few years, any foreign flows to local equity or debt markets could potentially carry a considerable upside. Particularly, portfolio flows which has remained quite weak over the past few years, could see some spark in the event of foreign money coming in to the country. Given the early stages of the upgrade, any sizeable impact stemming from such financial flows will need time to materialize and is still too early to predict.

The Fed raised rates due to rising inflation. Its committee voted unanimously to raise the rate by a quarter point, to a range of 3.75% to 4%. Prices have remained high due to a combination of tariffs, the energy shock from the Iran war, and heavy spending on AI. This trend showed no improvement over the summer. Sixteen of eighteen officials expect another hike this year. The Fed now expects inflation to reach its 2% target only in 2029. The bond market adjusted ahead of the interest rate decision. On September 15th the US 10-year Treasury yield touched 5.04%, its highest level since July 2007. One reason was oil trading above $100 a barrel. Investors also want more return for holding US debt as the deficit grows and tech firms borrow heavily to build data centres. The 10-year yield decides the price of American mortgages. The average 30-year mortgage rate has climbed to 6.95%.

Japan raised rates owing to the pickup in the oil and wage bills. The country imports almost all of its oil, so higher crude prices pass directly into living costs. The central bank of Japan also pointed to steady wage growth and a shrinking workforce. The rise to 1.25% came three months after the last one, half the previous gap. The yen fell after the decision because investors sought a clearer roadmap for rake hikes. Japan’s 10-year yield reached 3% last week for the first time since 1996.

The Bank of England held rates. Its committee voted 6 to 3 to keep the rate at 3.75%, with three members voting for 4%. UK inflation rose to 3.1% in August, and the Bank expects it to go higher. The majority held because there is little sign yet that costly energy is feeding into wages and wider prices. Markets consider the hold as a pause. British borrowing costs have also reached a level last seen just before the global financial crisis. On Thursday the 10-year gilt yield rose 10 basis points to 5.378%, its highest since July 2007.

Investors welcomed the rate decisions, but rising energy prices soon unsettled markets again. In New York the S&P 500 rose after the Fed’s announcement. The gain faded once Saudi Aramco told European refineries to expect no crude next month and US diesel prices hit a record. In London the FTSE 100 closed 1.2% higher on the day the Bank of England held, even as gilt yields climbed. In Tokyo the Nikkei gained after the Bank of Japan’s hike.

Households in all three countries remain unsettled and expect prices to keep rising. In the US, the University of Michigan’s sentiment index fell to 47.8 in September, its second-lowest reading on record. Americans expect prices to rise 4.6% over the next year, and prices have outpaced average wages for five straight months. In Britain, the Bank of England’s survey found the public expects inflation of 4% over the next year and 3.9% in five years’ time, both well above the 2% target. In Japan, consumer confidence recovered to 35.5 in August but remains far below the 50 mark that signals optimism. Core inflation there has stayed under 2% for seven months, which partially explains the stance taken by board members who opposed the recent hike.

What does this mean for Sri Lanka?

Sri Lanka faces the same external pressures. Inflation reached 8.0% in August, a three-year high. It was above the Central Bank’s upper limit for the second month in a row. The current account has been in deficit for four months, mainly because fuel imports cost more. Brent was at $106 in mid-September. Crude eased late last week after Saudi Arabia moved to restore shipments through its damaged pipeline, but prices are still high. Gloomy households in Britain and the US may also spend less on foreign travel, which would weigh on already faltering tourism earnings. Strong remittances flows may however counteract this current account drag. The Central Bank last policy decision was a hike by 100 basis points to 8.75% in May with the next rate decision to be made at the end of this month.

Rising bond yields in the US, Britain and Japan make it harder for smaller markets to attract money. Higher Japanese rates also make it less attractive to borrow cheaply in yen and invest abroad, a flow that has long supported emerging markets. The effect is already visible in the region. India’s 10-year yield rose to near a four-month high, partly because of higher global yields.

What are main reasons for US bond yields to rise?

The sudden escalation in the Middle East conflict over the last two weeks has caused oil prices to jump back above USD 100 per barrel, renewing inflation concerns in the US and the rest of the world. Investors usually tend to demand higher interest rates or yield margins on government bonds when inflation expectations are high. This has been one of the biggest factors behind the continuous pickup in bond yields over the past month. At the same time, the annual US government budget deficit and debt have been rising, with the budget deficit expected to top USD 2 trillion by the end of this year and US debt surpassing USD 40 trillion for the first time ever. With the government issuing more debt, investors are less likely to take on the debt for a lower return, which pushes yields higher. Further, large tech and AI firms are also borrowing more as the AI boom picks up and with large private firms such as Google and Amazon are willing to pay higher rates, creating further pressure on the US government to increase its rates.

Are other financial markets facing the same issue?

Financial market players in the euro area are also bracing for interest rate hikes well into next year, as the European Central Bank has hiked borrowing costs and increased its inflation forecast, just as oil prices jumped again due to the Iran war, with bond yields hitting multi-year highs.

On Thursday, the UK 10-year gilt yield jumped by 10 basis points to 5.378%, its highest since July 2007, a level last seen on the eve of the global financial crisis. This has added further pressure on the new finance minister, John Healey, ahead of his first annual budget statement next month. According to Susannah Streeter, chief investment strategist at Wealth Club, “steamy energy prices” appear to be the biggest trigger for these latest yield rate movements. She also adds that a structural shift among borrowers away from US Treasuries towards corporate debt in search of higher returns has also been a factor behind the rise in global government bond yields.

On the other hand, Japan’s 10-year yield peaked at 3% last week for the first time since 1996, mainly as a result of concerns over inflation and fiscal spending, together with expectations that the Bank of Japan will raise rates more quickly. The milestone coincided with a 4% rally in the yen this month and growing speculation that the Government Pension Investment Fund (GPIF) could eventually increase its allocation to domestic bonds.

How will this affect policy rate changes?

The Chicago Mercantile Exchange noted that the odds of the Federal Reserve raising its key policy rate by a quarter percentage point during this week shot up to about 86%, from the previously held 72% chance last Thursday. However, the global bond market took a slight breather last Friday after the widely anticipated US inflation report met economists’ expectations, pushing up the odds of a Fed “wait-and-see” approach.

The European Central Bank also voted to raise its key deposit rate by 25 basis points, from 2.25% to 2.5%, due to the uncertain outlook surrounding the continuation of the US-Iran war and its impact on inflation. Investment strategists said the decision indicates that further rate rises are now likely.

What does this mean for Sri Lanka and other emerging markets?

The rise in global government bond yields could create renewed pressure on emerging markets, including Sri Lanka, particularly if higher yields persist. Rising US Treasury yields make developed-market assets more attractive to global investors, potentially reducing capital flows towards emerging markets as investors demand higher returns to compensate for increased risk. This could put pressure on emerging market currencies, bond yields and external financing conditions.

For Sri Lanka, higher global yields could increase the cost of external borrowing if the country it to look at it somewhere in the future. At the same time, renewed inflation concerns and oil prices above USD 100 per barrel could increase the import bill and put pressure on the current account and inflation. However, Sri Lanka is better positioned than during the 2022 crisis, with stronger reserves, improved external balances and ongoing IMF-supported reforms providing greater buffers.

Global oil prices have moved in the opposite direction. Compared to an average Brent crude price around USD 80-85/bbl in June and July, August is running closer to USD 90/bbl so far. Compared to the USD 70/bbl point around late June, this is a pretty significant increase. While this could be a negative, there are a few counterweights that can balance against this oil pressure such as the end of the USD 75 mn a month FX payment to the RBI. Any lower import pressure after mid-year import spikes, any continuation of remittance flows, any recovery in tourism, and support from port services and petroleum exports may buffer the current account as well.

Despite the potential “good news” on the horizon, there are also plenty of worries around as well. Will oil prices rise again? Will tourism continue to be weak? Will El Nino result in huge agricultural or energy impacts? Will domestic markets seize up again?

In this month’s report we explore our expectations of these positive and negative triggers, the likelihood of them transpiring and how we think businesses can position themselves in these market conditions.

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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 25th August 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.

Prior to the breakout of the Iran war, our expectation was for inflation to significantly underperform CBSL’s 5% target due to structural reasons. An appreciating currency together with low energy prices were the main drivers for us back then alongside currency and commodity risks that we highlighted. The very fact that two months later, Sri Lanka had to face the BIGGEST oil shock in history to move into that negative scenario tells how structurally low inflation was.

In this month’s Focus, we explore how the various subcomponents within the CCPI have moved since the war and look for any particular drivers we see that is behind the recent pick-up in inflation. Furthermore, we provide our broad outlook on global oil prices and tie it into what we think the inflation pathway will look like by the end of the year by presenting multiple scenarios and our outlook across all those.

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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 25th of August 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.

Oil prices have remained volatile while crude and refined products have not always moved the same way.

The current period of oil-market volatility began in late February 2026, when the conflict involving Iran raised concerns about possible disruptions to crude oil flows through the Strait of Hormuz. These fears pushed oil prices higher as markets began to price in the risk of some level of supply disruption.

By June, however, conditions had started to ease with the hope of a peace deal coming through. As a result, part of the geopolitical risk premium built into crude prices appeared to fade, with the price of a barrel of Brent crude oil returning back to the USD 70 mark. Even as crude prices declined, several refined products such as diesel and gasoline did not fall as much, suggesting that pressures further down the supply chain had not eased to the same extent. Then, from late August into early September, renewed geopolitical tensions once again raised concerns over regional oil flows, pushing Brent back above USD 90 per barrel.

Taken together, these developments suggest that the market has moved through three distinct phases: an initial crude supply shock, a period of partial easing, and a renewed rise in geopolitical risk. At the same time the fact that crude oil prices have not moved exactly in the same way as refined products does, this may suggest that the availability of refined fuels may remain tight even when crude market pressures temporarily ease.

What does the Crack Spread show?

This is where crack spreads become useful. In simple terms, refineries buy crude oil and process it into products such as diesel, gasoline and jet fuel. The difference between the price of crude and the value of these refined products is commonly referred to as the crack spread, and although it is not the same as actual refinery profit, it is often used as a broad indication of refining margins.

A widening crack spread can occur for several reasons. Refined product prices may rise, crude prices may fall faster than refined product prices, or both may happen at the same time. During 2026, the IEA has pointed to a some disconnect between crude and refined product markets, with crude conditions appearing to ease at certain points while refined product markets remained relatively tight. This may suggest that some of the pressure has gradually shifted further down the supply chain, which could also indicate refiners raising margins to recover from possible losses.

Why are refining margins remaining high?

Several factors may be contributing to this divergence. Refining activity has been disrupted in a number of regions, while attacks affecting Russian refineries and interruptions to Middle Eastern refined product exports have reduced the amount of finished fuel available to the global market. At the same time, relatively low inventories may have made the market more sensitive to any additional disruption.

Diesel has been particularly affected, partly because it plays an important role in freight, agriculture, construction and industry. In August, the U.S. diesel crack moved above $100 per barrel for the first time, highlighting how tight the market for middle distillates had become relative to crude oil. This does not necessarily mean that demand is exceptionally strong; instead, it may indicate that the supply of refined products has become constrained compared with the availability of crude.

What Does This Mean for the World?

The broader implication is that falling crude prices do not always mean that the energy shock is easing to the same extent for businesses and consumers. If refining capacity remains constrained and supplies of diesel, gasoline and jet fuel remain tight, fuel prices could stay elevated even when Brent softens.

This may continue to affect transport costs, freight charges and production expenses, which could in turn place some upward pressure on inflation. It also means that one should pay closer attention not just on crude oil benchmarks, but also to refining margins, inventories and refined product trade flows when assessing the true impact of changes in the oil market.

What Does This Mean for Sri Lanka?

For Sri Lanka, this distinction may be especially relevant because the country depends on imported energy and is exposed not only to changes in crude prices, but also to the cost of refined petroleum products, freight and the exchange rate. As a result, a decline in Brent may not necessarily lead to an equally large reduction in the country’s petroleum import bill if refined product prices remain high.

Persistently wide crack spreads could therefore limit some of the benefit that Sri Lanka might otherwise receive from lower crude prices. Depending on how long these conditions continue, this may have implications for fuel import costs, foreign-exchange demand, transport expenses and, indirectly, domestic inflation.

What’s really going on between the two countries?

Despite being long-time allies and close trading partners historically, the two neighboring nations have been going through a rough patch ever since President Trump returned to office in January 2025. What started off by the US back in February 2025, and retaliatory measures taken by Canada in between, has eventually turned into a continuous back and forth impacting key industries like steel, aluminum, dairy, automobiles and lumber.

The latest announcement was from Canada’s Prime Minister Mark Carney who framed the move as a “dollar-to-dollar” and “strategic retaliation” designed to match the latest US tariffs – who imposed a 50% levy on $20bn worth of Canadian goods which is around 5% of Canadian exports to the US. President Trump has escalated matters further by threatening to double duties charged on Canadian cars and car parts to 50% come January 1^st. Tariffs also extend to paper products, alcoholic beverages – which accounted for around USD 1.5 Billion of US imports last year and a wide array of dairy products – which accounted for about USD 750 Million worth of imports by the US last year.

Canada is still facing lower average tariffs than others

Despite the headlines with numbers that seem stark, data shows that Canada still faces some of the lowest US tariff rates compared to other countries on average paid across all imports. While it was almost on par with Mexico (~3% on average) before the latest escalation, even after the imposed 50% on Canadian goods, the average is still close to 6% - similar to the average rate faced by countries like Vietnam and the UK. China still faces the highest average rate of around 20.5% with Japan – 10% and India – 8% following behind. The world average stands at around 7% according to data from the US Census Bureau.

How will this impact consumers and firms?

The two countries are heavily reliant and deeply integrated when it comes to trade. The US buys close to 70% of Canada’s exports and is a leading partner alongside Mexico and China for the US. However, data shows that Canada’s non US exports has picked up notably since President Trump took office and PM Carney has pledged to double it over the next decade. While Canadian businesses will have to deal with the additional burden of tariffs on top of already high commodity and energy prices stemming from the Iran war, this gives a broad sense of the longer-term pathway and highlights the importance of diversification for alternate markets.

The obvious impact for US consumers and importers come from possible price hikes as a result of higher tariffs on products. If the tariffs imposed by President Trump remain in effect and US importers are unable to absorb the added costs without hurting profit levels, it is likely that they will to pass on a greater share of these costs to consumers, leading to continued increases in domestic prices. While it’s costly for all parties involved, individuals and businesses will have to account for a sustained period of high uncertainty and heavy volatility particularly in the short to medium term as specifics are blurred and stability is far from reach.

In terms of spillover effects, one key point to note is that costs of a prolonged tariff war could extend beyond the North American region as well. As input costs for intermediate goods such as metals, chemicals, machinery components, and selected agricultural products rise, it could filter through into final consumer prices across multiple regions – from Europe to even Asia. This effect could potentially become more impactful when added on top of existing supply-side shocks – such as higher commodity and energy prices – and weather-related disruptions linked to El Niño conditions - and could drive inflation further across countries.

What does this mean for Sri Lanka?

For Sri Lanka, a full-blown trade war on the Western front only adds on to the already chaotic global trade landscape. As that part of the world does account for a major portion of our exports – particularly apparel - those who are directly exposed to the western trade flows may have to remain on high alert as new developments of the clash come in to the picture every day. As Canadian exporters look to diversify markets, and supply chains also shift alongside any changes happening, it could also bring newer niche export-import opportunities for local players. In of financial markets, as sentiment around stability dampens and investors are looking to park funds in emerging economies – this could also carry a huge upside for Sri Lanka to attract foreign inflows given the strong macro fundamentals the country has recorded over the past three years.

Despite the shock, over the last half decade or so oil prices we think moved through two regimes. Initially prices crashed with Covid, then recovered as economic activity resumed and OPEC cut supply. But since late 2022, despite continued OPEC cuts, prices have trended down fairly consistently for three years. We attribute this structural shifts in China and the falling cost of renewables globally. Absent the war, we’d have expected prices to keep sliding across 2026 as well.

Then even in an escalated scenario like now, historical data shows a clear pattern - wartime spikes rarely stick. In the Russia-Ukraine war, prices returned close to pre-war trajectory within about six months. The Arab Spring saw similar dynamics, with roughly half of price gains given back within six months. Prices are typically driven first by panic, only later by actual production damage, which tends to be repaired swiftly and adjustments back to pre conflict normalcy occurs even with conflicts that goes on for years.

Our clients would have already received a detailed report to their emails on this. The full report has also been accessible on our Athena reports platform since the 25^th of August 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.

El Niño at a critical global juncture?

El Niño is a naturally occurring climate phenomenon associated with unusually warm sea-surface temperatures, in particular, across the central and eastern tropical Pacific Ocean. The warming changes atmospheric circulation and disrupts normal weather patterns across large parts of the world. The WMO estimates that there was an 80% probability of El Niño conditions developing during June–August 2026, with the probability rising to around 90% for the following months.

Reuters reports that the strong El Niño events of 1982–83 and 1997–98 were associated with estimated global economic losses of around $4.1 trillion and $5.7 trillion respectively. However, the current event is occurring under different circumstances. Global supply chains remain exposed to geopolitical disruptions, while fertiliser and energy markets are already under pressure due to conflicts in the Middle East.

On top of it, the current El Niño conditions are developing at a time where global temperatures and ocean temperatures are already exceptionally high. As a result the WMO expects above-normal temperatures across much of the world during the August–October period, while rainfall patterns are expected to become increasingly uneven.

However there’s a slight counterweight, a positive Indian Ocean Dipole (IOD) is also expected to develop, around the similar period. This occurs when sea-surface temperatures become unusually warm in the western tropical Indian Ocean and cooler than normal in the eastern Indian Ocean. This temperature contrast could change wind patterns and pump more moisture-laden air towards the South Asian region. While a strong El Niño typically promotes drier conditions or suppresses rainfall in parts of South Asia, a positive IOD could partially offset these effects. When both occur together, the positive IOD can cushion El Niño’s drying effects, potentially resulting in heavier-than-expected rainfall or mitigating extreme drought risks during monsoon transition periods.

What are the costs attached to such conditions?

El Niño does not produce the same weather conditions everywhere. Some regions experience drought and extreme heat, while others receive unusually heavy rainfall and flooding. These changes can affect agricultural production, fisheries, hydropower generation, transport infrastructure and energy demand. The economic importance of El Niño therefore comes from its ability to simultaneously affect supply, prices and productivity across several sectors.

The most immediate economic transmission channel is likely to be food prices. The FAO has warned that a combination of geopolitical conflicts, higher energy and fertiliser costs and the effects of El Niño could create a new wave of global food inflation. When droughts, floods or extreme heat reduce agricultural output, global supplies of affected commodities decline, resulting in higher prices. These higher commodity prices can eventually feed into consumer prices for food and beverages.

El Niño can also affect energy markets through both supply and demand. Hotter temperatures increase demand for electricity for cooling, while drought conditions can reduce water availability for hydroelectric power generation in some regions. At the same time, extreme weather can disrupt energy infrastructure and transportation networks. This creates the possibility of higher electricity and energy costs in vulnerable economies, adding another source of inflationary pressure with current energy prices already seeing upward pressure due to the uncertainties around Iran.

How will Sri Lanka be impacted from all this?

For Sri Lanka, El Niño is particularly important because the country is highly exposed to changes in rainfall, agriculture, as well as food and energy costs. Changes in rainfall and temperature could affect the production of agriculture and energy generation. A reduction in domestic agricultural output could add further pressure to the current account by requiring additional imports of goods in short supply. This could also add to inflationary pressures, which have already shown signs of volatility.

In terms of hydropower generation, if El Niño-related weather patterns reduce water availability in strategic areas, Sri Lanka could become more dependent on thermal generation and imported fuel. However significant growth in solar generation still acts as a significant counterweight towards it but still a reduction in hydro still opens up space for a possible increase in costs for energy generation.

The contest has now shifted from what the companies build to what governments will allow. On July 7th Bloomberg reported that American officials are looking at how Chinese firms rent computing power in other countries, which is legal today. That follows guidance issued on May 31st saying a Chinese company needs a licence to buy advanced chips even when the office doing the buying sits outside China.

Washington has changed its mind twice on selling chips to China. In January it allowed the sales, capped at a volume analysts put near a million units. The sales never happened. Security scrutiny from both countries stalled these sales. A bigger rewrite of the rules is now promised before September 30th, and it will take effect immediately, without a comment period.

The argument has since also moved to the usage of Chinese systems by American firms. The administration is considering rules that would stop American businesses and cloud providers from using Chinese AI, in the same way Chinese cars, robots and routers are already blocked. Treasury Secretary Scott Bessent has called the way Chinese firms learn from American systems intellectual property theft. American companies do not agree. Twenty-five of them, including Nvidia, Microsoft, Meta, OpenAI and Google, signed a letter warning that restrictions would push the work abroad. Anthropic did not sign it.

China is finding workarounds for this problem. Beijing has drafted a $295 billion plan for a national computing network running on 80% domestic chips. The difficulties are the factories, the memory supply and the software. One large Chinese firm lost three months of work when it moved from American hardware to a local alternative. The switch is being reflected by the current market share. Chinese chips took close to 41% of their home market last year, roughly half of that from Huawei. Before 2023 foreign suppliers held 90% or more.

America’s position in the race for dominance depends on a very large bet. AI companies produced 85% of the gains in the S&P 500 this year. Data centre building is half of all business investment. More than 80% of global venture money in the first half went to AI startups. That spending ends up at buildings that require copious amounts of power which is currently a major limitation. Bank of America expects data centres to add about 125 gigawatts of American demand by 2030, and the turbines needed to supply it are already spoken for.

What does this mean for Sri Lanka?

The exposure primarily comes through the IT sector. ICT and BPM exports earned $150.49m in June, up 11.31% on the year, while services exports as a whole grew 3.75%. Cheaper machine-written code lowers what clients will pay for the coding and back-office work that produced most of that growth.

The second channel is the data centre plan. Deputy Minister of Digital Economy says procurement is underway to set up AI data centres for local and regional customers, and to earn foreign exchange from them. Sri Lanka AI Week runs from September 28th to October 4th, against a target of $5bn in technology exports.

Looking at the labour market, birth rates are falling and a large share of the workforce is moving towards retirement. Over the medium to long term, it leaves the country trying to grow with fewer people in the working population. This concern raises the question of whether capital can do what labour used to? If the lack of labour results in a situation where growth is affected, could we plug this gap by using AI-augmented capital? Much of this is still unknown, but if this is a possibility it would be a considerable shift from the traditional workflows Sri Lanka is currently used to.

In such a context, how the EU and Chinese decide to play this out remains key not only to the domestic players of the two regions but also to those who lie in between those supply chains that connect the East and West.

What’s the big worry?

Immediate concerns of the EU – similar to the US – is circled around the massive trade imbalance China runs against the bloc which has resulted in increased competition, forced de-industrialization and a number of different issues both lawmakers and businesses in the EU have had to deal with. The EU’s trade deficit with China roughly doubled in five years from 2020 to 2025. In 2025, China’s trade deficit with the region reached a record USD 1.2 Trillion! It was a massive eye-opener for the bloc as ALL member states recorded a trade deficit with the country for the first time. The trend continues into this year as well. According to latest figures, China’s June trade surplus with the European Union reached a record USD 32.9bn, up 27% from a year earlier.

From Europe’s perspective, the core issue is China’s industrial “overcapacity.” China is ramping up production capacity across a number of industries including electric vehicles, batteries, solar technology, critical minerals, and advanced tech enforcing increased competition for EU businesses. Specific countries face specific issues that have put domestic players under pressure. For instance, despite traditionally excelling in the capital goods sector, German manufactures are now under constant pressure as a result of Chinese manufacturing prowess coming into the space. Italy’s metalwork and machinery industry is also facing severe competition and have continuously called for better measures to protect domestic firms.

What looks to be EU’s strategy?

Driven by heavy state subsidies and large-scale production advantages, Chinese companies’ expanding presence in Europe has unsettled European businesses and pushed policymakers in the bloc to respond.

At the last EU summit, leaders gave the European Commission a mandate to develop a diversification instrument aimed at reducing European businesses’ reliance on foreign suppliers for critical goods. Discussions of “global economic imbalances” – a euphemism for the China problem – was a key topic in the recently concluded G7 summit as well. Denis Redonnet, the European Commission’s chief trade enforcement officer says that both structural and contingent trade protection measures have and will be implemented to curb the surge in Chinese imports including anti-dumping and anti-subsidy investigations alongside so-called ‘safeguard’ measures aimed at protecting EU businesses. Tariffs – particularly on Chinese EV’s and closely monitored quality standards continue to play a central role in EU’s protectionist measures.

How may China respond?

China enters into this landscape under heavy scrutiny – not only by its trading partners but also by international organizations such as the IMF and World Bank who have kept a close eye on its structural balances over the years. As a result, the country is also looking to re-shape its economic engine by taking various measures to boost domestic consumption and better navigate its growing surpluses. Alongside the battle against EU, Beijing is also having to deal with high pressures stemming from US as well.

Looking at how the country may respond to the measures taken by the EU, similar to how they did with the US, tariffs seem to sit at the bottom of the retaliatory ladder. Another prominent step taken by the Chinese are the heavy export controls imposed on rare earth minerals - a market that China dominates accounting for roughly 70% of global mining, and 90% of the world’s refining capacity AND could possibly bring European automotive and defense production to a halt within a matter of weeks!

However, given how high-level talks have progressed and the context in which the global trade landscape stands right now, it appears that even though the possibility exists, any extreme measures are just too costly for any party involved.

What does this mean for Sri Lanka?

For Sri Lanka – similar to many players who lie in between these East-West supply chains, the specific policy and trade measures taken by both China and EU could bring about a number of different and new opportunities and costs. For instance, as the EU tightened access to its market through tariffs, export controls and trade defense tools, the possibility of Chinese products flooding local markets is something domestic players might need to keep an eye out for. Similarly, new opportunities and developments may surface particularly to those players who are connected to global trade routes as countries increasingly look to reduce dependency and diversify trade with the intention of long-term sustainability.

We also observe how Sri Lanka’s debt burden, despite being considerably higher than its B- peers, has improved from 2022 numbers, where public debt levels stood above 100% of GDP. At the same time, while Sri Lanka’s interest payments levels are much higher than most economies that have a B- rating, the data of the past 5 years suggest that Sri Lanka has been able to improve its numbers at a faster rate than IMF forecasts.

While the elevated debt burden and interest payment obligations remain key constraints, the focus looks at the pace of improvement and relative performance against similarly rated economies and the possibility for Sri Lanka to receive a credit rating upgrade.

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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 28th of July 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.

It doesn’t have to come from an extended war alone. We think the world itself is far too shaky to be in a place of complete stability. Prices spiking one week, markets crashing another week, and even the immediate recovery back are all near certainties in the world of today. However, actual hostilities are still nowhere near the levels seen in April. Even the costs are still well below those levels.

Sri Lanka’s markets haven’t been able to withstand these volatile pressures too well. The currency went haywire in May, electricity and fuel prices have skyrocketed, and the market has even raised its risk premium for long-term interest rates. All this point towards markets that are quite nervous. Sri Lanka’s markets which has been used to heavy government/central bank intervention in the past which possibly took part of the costs, these mechanisms do not exist anymore hence they are seeing shocks move through them this fast.

But things aren’t that bleak on a broader level. In past oil shocks, Sri Lanka needed to heavily borrow from foreign markets to keep economic activity ongoing. The country doesn’t really need to do so anymore. The government keeps earning far more in tax revenue than it can spend, and even with the biggest supply shock in a generation, the economy is still able to meet its own dollar requirements. Even in a context where more shocks materialize, we think markets will take the hit rather than the structure of the economy itself.

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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 28th July 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.

The new 10-12.5% tariff. How does it work?

The newly implemented tariffs are based on claims that key trading partners have failed to properly tackle forced labour and are therefore implemented to “punish countries for not doing enough” to reduce forced labour. Consequently, 60 countries, including the UK, China, the European Union, and Canada, will face a tariff ranging from 10% to 12.5% based on the gravity of the claim.

However, US trade expert Caroline Freund said the move is “not about forced labour” but that Trump is simply “looking for a legal reason to put the tariffs in“. The latest tariffs fall under Section 301 of the Trade Act of 1974, which had been used sparingly before Trump’s presidency. This allows the president to impose tariffs if the US Trade Representative has conducted the required investigations and found sufficient evidence of unfair labour practices that affect American commerce. According to Alan Wolff, a senior fellow at the Peterson Institute for International Economics and the former deputy director-general of the World Trade Organization, it is very likely that these latest tariffs will once again be challenged in court.

How will US consumers and importers be affected?

The new duty applies to nearly 99.4% of US imports; however, economists say that the Section 301 duties are less likely to affect inflation and consumer finances, given the relatively lower tariff levels compared to the previous year, which likely already pushed prices up and contributed to inflation. According to Angelo Kourkafas, senior investment strategist at Edward Jones, “the new tariffs are broadly consistent with the previous tariff levels that expired and should not trigger another round of rises in goods prices”. At the same time, a number of importers have already filed lawsuits after the tariffs took effect, arguing they revived a tariff regime the Supreme Court had already struck down.

How other countries have reacted?

The UK government said firms are not likely to face a change in tariffs, given its previously agreed rates around the 10% level. However, a government spokesperson said that matters regarding forced labour are taken very seriously to “ensure that in global supply chains UK businesses are not complicit” in forced labour participation. Brazil called the 12.5% tariff it is facing “unjustified”, while the Japanese government said it regrets the new tariff. Australian Trade Minister Don Farrell said the levies were “completely unjustified”, while China called the move a “political manipulation”.

What does this mean for Sri Lanka?

Sri Lanka stands in a relatively better position than its initial 44% rate implemented during Liberation Day, which was then adjusted down to 30% and later to 20% after a few rounds of negotiations, before finally settling at the temporary 10% global rate. According to the Office of the United States Trade Representative (USTR), Sri Lanka qualified for the lower 10% as it had either adopted/partially implemented, or committed to enforcing, restrictions on imports linked to forced labour. This followed a gazette issued on the 10th of July 2026 by Sri Lankan President Anura Kumara Dissanayake, which immediately prohibited the importation of goods produced wholly or partially using forced labour. The measure followed warnings that Sri Lankan exports could face a 12.5% tariff. The newly implemented 10% rate, therefore, puts the country on an equal footing with its competing exporting peers, including India, Bangladesh, Indonesia, and Malaysia.

What was discussed?

This year’s discussions focused primarily on regional security, maritime disputes, economic resilience, energy security and strengthening ASEAN’s partnerships with major global powers.

One of the most significant issues on the agenda was the South China Sea, where numerous regional nations dispute over territory.Shortly after the 10th anniversary of the historic 2016 arbitral tribunal decision that nullified the legal foundation of China’s expansive claims to a large portion of the South China Sea, the subject has gained fresh attention. Beijing has disregarded the decision and is still standing by its assertions. Foreign ministers expressed concern over continued tensions in disputed waters and emphasized the importance of maintaining peace, stability and freedom of navigation in accordance with international law. The ministers also reiterated the need to accelerate negotiations on an effective and substantive Code of Conduct between ASEAN and China to reduce the risk of future confrontations.

The worsening humanitarian and political crisis in Myanmar remained another key priority. In 2021, after the Myanmar military overthrew the elected government, widespread armed conflict began between the military government, pro-democracy resistance groups, and several ethnic armed organizations. Years of fighting have displaced millions of people, damaged civilian infrastructure, disrupted healthcare and education, and left large parts of the country dependent on humanitarian aid. The ASEAN’s primary diplomatic response has been the Five-Point Consensus, which intended to reduce violation and provide humanitarian assistance. During the recent meeting, ASEAN ministers reviewed the progress made under this Five-Point Consensus and reaffirmed their commitment to facilitating inclusive dialogue, expanding humanitarian assistance and working toward a peaceful resolution of the conflict. While acknowledging the continued challenges, member states stressed the importance of maintaining ASEAN’s engagement with Myanmar while seeking practical avenues for progress.

Developments in the Middle East, particularly the ongoing tensions involving Iran and disruptions to global shipping routes, also featured prominently during the meeting. Ministers expressed concern over the implications for global energy markets and regional economic stability, calling for restraint, diplomacy and peaceful resolution of conflicts. Discussions also explored strengthening regional energy cooperation and improving ASEAN’s resilience against potential disruptions to global oil supplies.

Beyond security, ministers discussed ways to enhance regional economic resilience amid an uncertain global environment. Priorities included strengthening supply chains, improving food and energy security, accelerating digital transformation and expanding cooperation in emerging technologies, including artificial intelligence. The gathering also provided an opportunity for extensive engagement with ASEAN’s dialogue partners. Meetings with the United States, China, Japan, India, Australia, South Korea, the European Union and Russia focused on trade, investment, connectivity, maritime security and regional stability. Amid growing strategic competition between the United States and China, ASEAN leaders reaffirmed the importance of maintaining the bloc’s neutrality and central role in promoting dialogue and cooperation across the Indo-Pacific.

What could this mean for the global economy and trade

The discussions at the 59th ASEAN Foreign Ministers’ Meeting re-emphasized Southeast Asia’s growing importance in maintaining stability across global trade and investment networks. Continued efforts to preserve freedom of navigation in the South China Sea are critical, given that a substantial share of global maritime trade passes through these waters. Progress toward a Code of Conduct could reduce geopolitical risks and provide greater certainty for international shipping and regional commerce.

The emphasis on strengthening supply chains, energy security and digital cooperation also reflects ASEAN’s intention to position itself as a reliable manufacturing and investment hub amid ongoing diversification away from excessive dependence on single-country supply chains. Meanwhile, closer engagement with major economies is expected to support investment flows and reinforce ASEAN’s role as one of the world’s fastest-growing economic regions.

How will Sri Lanka be impacted from all this?

Although Sri Lanka is not a member of ASEAN, developments within the bloc carry important implications for the country’s economy. ASEAN represents one of Sri Lanka’s largest regional trading partners, and stronger economic integration and regional stability could create additional opportunities for exports, investment and tourism.

Efforts to safeguard maritime security in the South China Sea are particularly relevant for Sri Lanka, as smoother shipping routes contribute to more stable global trade flows and lower transportation costs. Reduced disruptions to international energy markets could also help moderate fuel prices, easing import costs and inflationary pressures domestically. As regional investment patterns evolve, Sri Lanka could benefit by positioning itself as a complementary logistics and services hub within the broader Indo-Pacific region.

The shape of China’s economic model

China’s economic model has historically focused on building capacity first and worrying about demand later, with Gross Capital Expenditure accounting for over 40% of GDP - about double that of the United States. A state-dominant banking system has reinforced the supply side through subsidies and credit allocation to exporters and manufacturing sectors, while consumption has remained structurally weak due to contained deposit rates, lower welfare spending, and social behaviors. This imbalance between strong supply and weak domestic demand led China to become a global manufacturing powerhouse reliant on international consumers to absorb its surpluses. Alongside this, policies supporting FDI and massive infrastructure investments - from expressways to telecommunications - reduced logistical costs and strengthened trade competitiveness, while rapid technological transformation and digital adoption across both private and state sectors further propelled China’s rise as a surplus-driven, innovation-led manufacturing giant.

What everyone is worried about

However, over the past few years, challenges around weak consumer spending, shaky confidence and slower growth have surfaced repeatedly creating some level skepticism about the country’s growth momentum that affects pretty much all corners of the world.

Domestic consumption has remained structurally weak causing massive imbalances that have triggered not only domestic authorities but also trading partners and international organizations to rectify policy measures. Even though in recent months, the state has signaled support to boost domestic consumer spending, the data doesn’t really reflect a considerable pick-up as of yet. Part of it could be attributed to slower growth in wages and industrial overcapacity causing some layoffs across factories that has kept spending at bay. However, authorities continue to indicate consistent support even its five-year plan to ramp up spending.

Investment growth is also slowing down with local governments which spent considerably on infrastructure and manufacturing investments now being pushed to cut down costs as excess production capacities and misallocated resources are coming back to haunt them.

The underlying structural changes

As a result of these factors alongside other issues such as ballooning debt and slower growth numbers in some areas, overall confidence about China’s performance has been quite shaky over the past few months. However, while these stories often change with topline numbers, focusing on the underlying structural changes taking place within the economy in the context of the overall changes taking place in the global landscape could be a game changer for those involved.

In addition to consumer goods, advanced manufacturing taking center stage in China’s industrial economy is one such change we see. Increasing investments towards semi-conductors, AI, and advanced equipment have become the prominent feature.

Export destinations are also evolving alongside these trends. While trade with traditional partners in the ASEAN continue to expand, the country continues to move away from being dependent from a single market and strengthen its trade resiliency against a heavily uncertain global environment.

What does this mean for Sri Lanka?

China’s domestic policy and structural changes that could alter its growth trajectory undoubtedly carries global consequences on multiple fronts and thereby, could affect Sri Lanka as well. Given the current context, one such key area are oil prices. For instance, outside of the effects of the Iran war, if China’s demand remains weak, it could reduce global oil demand, which may limit oil price increases caused by geopolitical risks. This in-turn could ease the oil import bill and further assist Sri Lanka’s external current account balance.

Similarly, as Chinese consumers are encouraged to spend more, Sri Lanka stands to benefit from the considerable number of Chinese tourists flying into the country every year. From a tech standpoint, as China continues to drive the tech/AI boom parallel to the US, Sri Lankan players who are connected to tech supply chains could benefit massively as opportunities arise. Overall, as China navigates its domestic challenges in the backdrop of this increasingly uncertain global landscape, any old or new driver that is emerging is set to have spillover effects that could bring forth new opportunities and costs for those even connected even remotely.