CAPITAL MARKET CHALLENGES AND DEVELOPMENT PREREQUISITES IN GEORGIA

Abstract

  The­ article­ describes­ the­ challenges­ of­ capital­ markets,­ concepts­ of effects­ of­ capital­ markets›­ development­ on­ the­ economic­ growth,­ the current­ conditions­ of­ the­ capital­ market­ in­ Georgia,­ restricting­ and stimulating­ factors­ and­ preconditions­ necessary­ for­ the­ expansion­ of­ the capital­ market.­ Through­ comparative­ analysis,­ the­ problems­ and­ trends ­of development­ of­ capitalization­ are­ presented. 
  The­ formation­ of­ capital­ market­ is­ a­ long­ process.­ It­ requires­ the formation ­of­ financial ­instruments,­ consolidated­ legal ­or ­model­ norms, market­ infrastructure ­and institutions.­ In­ the­ developing­ countries,­ and moreover,­ in­ the­ Post-Soviet­ countries­ with­ least-developed­ economy­ and transformational­ law,­ the­ capital­ market­ is­ undeveloped­ considering­ the capacity­ of­ economy­ and­ its­ potential­ benefits. ­The ­banking­ sector›s­ability to­ finance ­the ­economy­ is­ restricted,­ the­ demand­ on­ investment­ capital­ is wide,­ as­ a­ result,­ with­ the­ traditional­ bank­ financing,­ establishment­ and development­ of­ the­ capital­ market­ is­ considered­ with­ any­ alternative.
  The­ paper­ analyzes ­the ­causes ­that ­impact ­on ­local­ capital­ markets­ functioning­ and­ the­ prerequisites­ without­ which­ the­ capital­ market­ can­ not­ be­ formed­ and­ developed­ in­ Georgia.­ The­ characteristics­ of­ impact­ factors­ on­ the­ capital­ market­ through ­examining­ of­ economic­ literature ­are ­presented.­
  The­ strong­ institutions­ and­ the­ well-functioning­ legal­ system ­are important ­for ­local ­market ­development,­ as ­they­ provide­ the­ protection­ of investors›­ rights,­ including­ the­ protection­ of­ minority­ interests­ and attracting­ investors.­ The­ studies­ show­ that­ the­ country,­ where­ the­ rights of­ shareholders are protected and the transaction is not expensive,­ has more­ developed­ local­ markets,­ however,­ there­ is­ the­ different­ view­ about the ­need ­for­ regulating ­the­ securities ­market.­The ­initial­ studies ­argued that­ the ­securities­ market­ may­ not­ be­ regulated,­ but­ according­ to­ the recent­ researches, ­the­ regulation ­is­ essential ­for ­private contractual framework­ standardization­ and­ fraud ­prevention.­Today ­it­ is­ widely recognized­ that­ the­ laws­ of­ securities­ are­ critical­ to­ the ­development­ of­ the ­capital ­market;
  Finally,­ the­ article­ proposes­ the­ structure­ of­ market­ prerequisites­ that bases­ on­ several­ piles:­ macroeconomic­ stability,­ institutional­ and­ legal system,­ market­ size,­ market­ composition­ and­ pension ­system, transparency­ and ­financial­ infrastructure.­ Despite ­the ­absence­ o institutional,­ legal­ and­ infrastructural ­barriers,­ many ­economies­ are unable­ to ­attract­ investors­ in­ order­ to­ ensure­ the­ optimum­ level­ of­ capital market ­and ­efficient­ liquidity.­ In­ this ­regard,­ the­ compulsory­ pension systems are­ introduced,­ which­ is­ an­ opportunity­ to­ attract­ the­ long-term instruments­ of­ investment.­ It­ is­ the­ condition­ of­ the ­development ­of ­the local­ bond­ market.­ With­ the­ liberalization­ of­ financial­ markets­ and­ in­ the effective­ regulatory ­environment, ­investments ­in­ the­ state ­bonds­ that dominate­ in­ Georgia­ today­ will­ be­ added­ by­ expansion­ of­ the ­corporate private ­bonds ­market. Similarly,­ the ­derivative­ markets­ cannot­ be developed­ without­ a­ well-developed­ market­ and,­ in­turn, ­they­ will contribute ­to­ the­ development­ of­ the­ capital­ market.­ Moreover,­ the­ bond market­ requires­ the­ well-developed­ money­ markets­ in­ order­ to­ encourage the­ monetary­ policy­ to­ ensure­ the­ stability­ of­ the­ percent­ rate­ that­ will support ­the ­development ­of ­the ­bond­ market.
  The­ developed­ infrastructure­ is­ one­ of­ the­ essential­ conditions ­for ­the functionality­ of ­the ­capital­ market. ­It ­promotes­ trade­ and­ information exchange­ and­ provides­ access­ to­ predictable­ products­ on ­the ­background of­ a­ less ­costly­ system.­ The­ transparency­ and­ information­ provision­ of corporations­ is­ also ­important,­ which ­instantly­ connects­ investors­ with money­ investors.­ In­ the­ framework­ of­ the­ Association­ Agreement­ with­ the  European­  Union,­  Georgia­  shall­  ensure­  approach­ to­ the­ legislation regulating­ trade­ with­ securities­ of­ the­ EU­ guidelines.­ The ­main requirements­ of ­directives­ are ­to­ increase­ the­ transparency­ of­ transactions­ and­ the­ price,­ the­ financial­ statements­ of­ the­ issuer­ and­ the openness­ of­ the ­information,­ as ­well­ as­ the ­equal­ condition­ for­ the investors.