A new report by the Lowy Institute, a Sydney-based think tank, predicts that development financing to Southeast Asia will drop to $26.5 billion in 2026, down from $29 billion in 2023. The decline is attributed to recent cutbacks by Western governments, which are redirecting development funding to defence and domestic spending.
The report notes that bilateral funding is expected to fall by 20% from about $11 billion in 2023 to $9 billion in 2026. The cuts will hit poorer countries in the region hardest, and “social sector priorities such as health, education, and civil society support that rely on bilateral aid funding are likely to lose out the most.”
The European Union and seven European governments will cut foreign aid by $17.2 billion between 2025 and 2029, while the UK has announced it will cut foreign aid spending by $7.6 billion annually. The United States has also made significant cuts, with President Donald Trump shutting down the US Agency for International Development (USAID) and slashing nearly $60 billion in foreign assistance.
According to the report, governments closer to home, like China, will play an increasingly important role in the development landscape. “The centre of gravity in Southeast Asia’s development finance landscape looks set to drift East, notably to Beijing but also Tokyo and Seoul,” the report said. “Combined with potentially weakening trade ties with the United States, Southeast Asian countries risk finding themselves with fewer alternatives to support their development.”
China’s overseas development assistance has started to bounce back after a sharp decline during the COVID-19 pandemic, reaching $4.9 billion in 2023. However, its spending focuses more on infrastructure projects, like railways and ports, rather than social sector issues. Beijing’s preference for non-concessional loans given at commercial rates benefits Southeast Asia’s middle- and high-income countries but is less helpful for its poorest, like Cambodia, Myanmar, Laos, and East Timor.
Experts say that Japan and South Korea can fill in the gaps left by the West, but their ability to do so is uncertain. Both countries have expanded their development assistance to include civil society projects. Grace Stanhope, a Lowy Institute research associate, noted that Japanese and Korean development support is often less overtly “values-based” than traditional Western aid, but they have been moving into the governance and civil society sectors.
However, Shiga Hiroaki, a professor at Yokohama National University, is more “pessimistic” that Japan can step in to fill the gaps left by the West. He said cuts could even be made as Tokyo ramps up defence spending to a historic high, and a “Japanese-first” right-wing party pressures the government to redirect funds back home. “Considering Japan’s huge fiscal deficit and public opposition to tax increases, it is highly likely that the aid budget will be sacrificed to fund defence spending,” he said.