Asian economies are thankfully still far from 'financial meltdown': analyst

But not all is well.

According to UBS Asian Economic Monitor, it is liquidity risk that matters most in large credit expansions, not the level of debt. It is well known that debt is very high in China and North Asia, whereas debt is relatively low in ASEAN and India. 

The irony is that while debt is much lower in ASEAN and India, and this is constantly sighted as a reason for optimism, those lower debt economies are where most of the liquidity risk lies in Asia.

Here's more from UBS:

This is why you are seeing pressure on foreign reserves and exchange rates in India and Indonesia. Systemic liquidity risk is function of current account balances (foreign funding dependence), loan to deposit ratios (domestic liquidity risk), and capital account openness (how easy is it for liquidity to drain).

As we prepare for QE tapering it’s the economies with current account deficits, high loan to deposit ratios, and open capital accounts that risk financial dislocations, whereas in China and North Asia it’s more likely to be a bad case of debt overhang.

Again, we’re still far from the pre-97/98 vulnerabilities; hence, we are not in the financial meltdown camp yet. However, that’s not the same as saying all is well. All of these economies are on the wrong path, in our view.

Our base case is that much of ASEAN and India will continue to face a financial grind in the quarters ahead. However, unless measures are taken to slow credit and correct current account deficits things should logical get worse over time.