Asia Edge economic and market developments Report Interpretation

Overview

This weekly Asia Edge macro update examines inflation, activity, fiscal policy and sovereign financing in Pakistan, Sri Lanka, Vietnam and Mongolia. Its central message is that food and fuel shocks have interrupted disinflation in several economies, while Vietnamese activity and Mongolian mining output remain strong.

Core views

Pakistan’s annual headline inflation accelerated to a four-month high of 11.2% in August from 9.2% in July, ending three months of disinflation. Food inflation reached a 29-month high of 13.9%, adding 1.1 percentage points to the headline change, amid higher wheat, flour, vegetables and fruit prices; reported wheat shortages and monsoon-related supply disruption were cited as drivers. Higher water charges added 0.4 percentage points and rebounding fuel prices added 0.3 points, with daily retail-fuel adjustments allowing substantial international-price pass-through. JPMorgan maintains its forecast for inflation to ease to 9% by end-December and average 9.4% in FY2026/27, conditional on lower oil prices in its commodities baseline, but expects inflation to return to the State Bank of Pakistan’s 5%-7% target range only in late 2027. It argues that further rate hikes are needed for a sufficiently restrictive stance, though it expects the SBP to hold at its September 14 meeting after dovish communication. Sri Lanka’s headline inflation increased to 8.0% in August from 7.3% in July, its highest level since July 2023, as food inflation rose to 8.5% from 6.3%. Fish, green chiles and milk powder drove a concentrated rise, while non-food inflation edged down to 7.7% year on year as transport costs eased. Core inflation nevertheless accelerated to 5.4% from 4.4%, potentially reflecting processed-food prices and selected non-food categories. JPMorgan considers the shock temporary but raises its year-end inflation forecast to 6.0% from 5.6%; oil, weather-sensitive food prices and delayed pass-through from May–June rupee depreciation are near-term upside risks. It expects the Central Bank of Sri Lanka to hold on September 29, while seeing a need for hikes if inflation remains at current levels or rises further above the 5% ±2% target range. Vietnam’s CPI inflation rose to 4.9% year on year in August from 4.5%, slightly exceeding both JPMorgan’s and consensus forecast of 4.7% and the SBV’s 4.5% target. The acceleration was almost entirely transport-led: average gasoline and diesel prices rose 6.8% and 16% month on month, respectively, amid higher international oil prices and refining margins. JPMorgan expects inflation to reach 5.2% in September as fuel costs feed into other CPI components, then ease to 4.6% as oil prices decline in its baseline. It forecasts headline inflation averaging 4.6% in 2026 and 3.2% in 2027, assuming stable growth momentum and the exchange rate, while warning that Middle East-related oil volatility, El Niño-related food disruption, rapid credit growth, fiscal easing and macroprudential easing could lift inflation and financial-stability risks. The SBV is expected to remain on hold for now. Despite the inflation pressure, Vietnamese activity remained strong. Manufacturing production growth eased only modestly to 19.0% year on year in August from 20.1%, while output still rose 31.8% quarter on quarter at a seasonally adjusted annualized rate. Electronics, electrical equipment and machinery weakened sequentially but retained strong annual and quarterly momentum; textiles, apparel, metals, plastics and furniture improved. The manufacturing PMI rose to 53.3, its highest since February, with the fastest output growth in more than two years. Mining output rose 18.3% year on year, including 23.4% growth in hydrocarbon extraction, 18.3% in coal and 28.4% in metal ore. JPMorgan therefore maintains its 8% 2026 GDP-growth forecast, supported by manufacturing, exports, fiscal easing and large investment-plan implementation. Pakistan raised US$3bn through 5½- and 10-year Eurobonds, its largest transaction on record and second international issuance of the year. JPMorgan views the market return as positive evidence of recovery, fiscal adjustment and reform progress under the 2024-27 IMF program. However, reported use of proceeds to repay US$3bn of Saudi deposits would mean less funding for current financing needs, maturity extension and buffers ahead of heavier repayments next fiscal year and the September 2027 IMF-program exit. Near-term needs are considered manageable, but repeated large market issuance is constrained by the B- sovereign rating, low tax revenue-to-GDP, limited reserves and weak structural growth. Bilateral support remains helpful but uncertain, as illustrated by the UAE withdrawal and short-term Saudi deposits. Mongolia’s supplementary 2026 budget proposes MNT 1.4tn of discretionary-spending cuts, including capex, to offset wage and pension increases and strategic-food-reserve costs. An early MNT 3.5tn Oyu Tolgoi dividend, equal to 2.9% of GDP, is expected to help finance next year’s tax relief and wage and pension increases. JPMorgan keeps its 2026 fiscal-deficit forecast at 0.8% of GDP excluding off-budget infrastructure projects, but expects a 1.6% deficit next year, the largest in five years. Real GDP grew 7.5% year on year in 2Q2026, led by mining-related net exports, prompting a rise in the 2026 growth forecast to 5.8% from 5.6%. The report cautions that fiscal loosening ahead of elections increases exposure to commodity boom-bust cycles.

Analysis framework

JPMorgan reviews the latest inflation and activity releases, decomposes price changes into food, fuel, utilities and other components, and links them to monetary-policy settings and forecast paths. It then assesses sovereign financing and fiscal developments through issuance, deposits, deficits, reforms and external-support conditions.

Methodology notes

• Industry AnalysisVolume-price decomposition

  Inflation contribution analysis

  The report separates headline inflation into food, transport, utilities and core-price drivers to explain why inflation changed in each economy.

• Other

  Macro forecast baseline scenario

  JPMorgan projects inflation and growth using stated assumptions for oil prices, exchange rates, growth momentum, fiscal settings and policy transmission.

Key data

• Pakistan August headline inflation11.2% y/yUp from 9.2% in July; food inflation reached 13.9%.
• Pakistan FY2026/27 average inflation forecast9.4%End-December inflation forecast remains 9%; target-range return expected only in late 2027.
• Sri Lanka year-end inflation forecast6.0%Raised from 5.6% after August headline inflation reached 8.0%.
• Vietnam August CPI inflation4.9% y/yUp from 4.5%; above the 4.7% JPMorgan and consensus forecasts.
• Vietnam 2026 GDP-growth forecast8%Maintained following strong manufacturing and export momentum.
• Pakistan Eurobond issuanceUS$3bnRaised through 5½- and 10-year bonds, the country’s largest transaction on record.
• Mongolia 2026 GDP-growth forecast5.8% y/yRaised from 5.6% after 7.5% y/y real GDP growth in 2Q2026.

Impact & implications

The report links fuel and food shocks to a slower disinflation path and a more cautious monetary-policy backdrop in Pakistan, Sri Lanka and Vietnam. It also finds that strong Vietnamese production and Mongolian mining support growth, while Pakistan’s external financing and Mongolia’s fiscal loosening remain important macro vulnerabilities.

Risks

• Pakistan faces persistent food-price pressure, limited reserves, weak tax revenue and constraints on repeated large external-market issuance.
• Sri Lanka inflation could remain elevated if oil prices, food prices or delayed currency-depreciation pass-through intensify.
• Vietnam inflation risks are tilted upward from oil volatility, weather-related food disruption, rapid credit growth, fiscal easing and indirect monetary easing.
• Mongolia’s fiscal loosening increases vulnerability to commodity boom-bust cycles.

What to watch

• Pakistan’s September 14 SBP policy meeting, food prices, fuel-price pass-through and confirmation of Saudi-deposit repayment.
• Sri Lanka’s September 29 central-bank meeting and whether inflation persists above the target range.
• Vietnam fuel prices, oil-market developments, food supply effects from drought and heat, credit growth and liquidity conditions.
• Pakistan’s ability to secure durable external financing ahead of heavier repayments and the IMF-program exit in September 2027.
• Implementation of Mongolia’s spending cuts, Oyu Tolgoi dividend receipts and mining-led growth.