Western aid cuts may drive SEA closer to China

By Joseph Bernard A. Marzan

A new study by a Sydney-based think tank warns that ongoing cuts in Western development funding to Southeast Asia, including the Philippines, could push the region to deepen economic ties with East Asian powers—particularly the People’s Republic of China (PRC).

The 2025 Key Findings Report of the Southeast Asia Aid Map, released on July 20 by the Lowy Institute in Sydney, Australia, showed that official development finance (ODF) to Southeast Asia reached US$29 billion in 2023.

ODF includes official development assistance (ODA) grants and concessional loans, along with other official flows (OOF)—mostly semi- or non-concessional loans in the Southeast Asian context.

While this total represents a modest rise from US$26.5 billion in 2022, it remains significantly below the US$33 billion recorded in 2020.

The uptick was driven mainly by the region’s largest development partners, particularly through non-concessional loans from the World Bank, the Mandaluyong-based Asian Development Bank (ADB), and the PRC.

China notably increased its ODF by 50% in 2023 compared to 2022, funding high-profile infrastructure projects such as the Jakarta-Bandung High-Speed Rail in Indonesia and the East Coast Rail Link in Malaysia.

In the Philippines, the Lowy Institute recorded an average of US$6.5 billion in ODF disbursed from 2021 to 2023—well below the US$10.7 billion recorded in 2020.

From 2015 to 2023, the ADB and the World Bank remained the Philippines’ top ODF contributors, with Japan ranking third.

The leading sector for ODF in the Philippines is government and civil society, covering areas such as social protection, public sector policy, and public finance management.

However, the institute cautioned that this level of support is at risk, as the United States, United Kingdom, and several European governments scale back international development cooperation.

Since taking office, U.S. President Donald Trump’s second administration froze roughly US$60 billion in foreign aid.

The United Kingdom also announced cuts amounting to US$7.6 billion.

Seven European governments—Austria, Finland, France, Germany, Italy, the Netherlands, and Sweden—are withdrawing US$17.2 billion in aid between 2025 and 2029.

Based on current budgets, official statements, and external research, the Lowy Institute projects total ODF to Southeast Asia may decline to US$26.5 billion by 2026.

This drop is largely driven by a projected fall in ODA from US$11.3 billion in 2023 to US$9 billion in 2026, assuming OOF and other financing sources remain stable.

The report says the effect on the Philippines will likely be limited, as foreign aid plays a smaller role compared to domestic resources, and non-concessional loans continue to be a major funding source.

Similarly, larger economies such as Indonesia, Malaysia, Thailand, and Vietnam are expected to withstand the cuts more easily.

But smaller and more aid-dependent nations—like Timor-Leste (95% of ODF from ODA), Myanmar (84%), and Cambodia (81%)—face heightened vulnerability.

These cuts may also reverse progress in health, education, and environmental programs across the region.

Combined funding from the U.S., U.K., and the European Union accounts for 68% of biodiversity and environmental aid projects, 37% of education, and 18% of health.

With Western funding declining, the report warns that Southeast Asian countries may increasingly turn to Beijing—along with Tokyo and Seoul—for alternative support.

It highlighted China’s strong aid relationships with Indonesia, Malaysia, and Thailand, while noting the more cautious engagement of the Philippines and Vietnam, which tend to align partnerships with domestic priorities.

Countries like Cambodia, Laos, and Myanmar, however, have limited options outside of China.

“China is the single largest partner on infrastructure financing in Southeast Asia, but traditional donors combined still outspend it,” wrote lead authors Alexandre Dayant, Grace Stanhope, and Roland Rajah.

“As Western aid declines and China recalibrates its strategy, Beijing is well positioned to regain dominance.”

They noted that total ODF to aid-dependent countries has nearly halved since 2020, falling from US$9.8 billion to just US$5.2 billion in 2023—even as these nations faced increasing poverty levels.

“The result is a deepening development divide: Southeast Asia’s higher income countries are capturing the lion’s share of international ODF, while lower income countries are being left behind despite pressing needs,” the authors wrote.

“If the current trajectory continues, especially amid Western cuts, this divide will become more entrenched, undermining the region’s long-term stability, equity, and resilience.”