The Group of Seven finance ministers’ initiative to encourage development of local capital markets in Asian and other emerging markets should be applauded. It highlights a problem bedevilling many countries in Asia and one that handicaps their ability to push for long-term high, sustainable growth.

Immature and illiquid domestic capital markets damp domestic investment and increase reliance on foreign financing. The resulting underinvestment is reflected in large current account surpluses. Often overlooked, however, is the broader impact of poorly developed debt markets on regional economic and monetary policymaking. A big issue facing many Asian countries – and an important concern for Standard & Poor’s in assessing sovereign creditworthiness – is the extent of their monetary flexibility, in particular their ability to respond to inflation.