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How should the Georgian Capital Market be Reformed?

An interview with Deputy General Director of  TBC Bank David Tsiklauri

In your opinion, why the Georgian capital market is so underdeveloped, and what is the main reasons for this?

Unfortunately, for many years, nobody paid attention to the promotion of factors that can encourage the development of the capital market. But without support from the state it cannot happen. Treasury bonds issued by the National Bank is an example of how  to achieve success if there is a plan of action. This process is transparent and automated as much as possible, respectively, an interest in the securities is quite high, including from major foreign investors.

So when there is political will, the country has everything necessary for the development of the local capital market. The first step that needs to be done in this area  is to change the legal base and form a more transparent corporate governance. After that, market participants will be more interested in the capital market.

How developed is Georgian stock exchange ?

The stock market in Georgia has not  practically existed for 20 years as nobody paid any attention to  its development. But last year fundamental issues related to the development of the stock exchange began to be settled.

What are the main challenges in the Georgian capital market?

It is necessary to start with the legal framework, in particular to change the  rules for the tax treatment of securities, improve financial monitoring. Information about the companies should be transparent, as an investor buys securities only if he can make a prediction about their prospects, and transparency is required just for this purpose. An investor should have all the information about a particular company.

In Georgia, many questions arise in this regard  – whether  business companies are ready to share their information when issuing shares? What will be  the quality of the information, whether it will be sufficient for the investor? In addition, the creation of private pension funds will be a good stimulus for the development of the capital market which will increase demand for the securities.

What needs to be done to ensure that the local capital market has  become interesting for foreign investors?

Foreign investors are primarily monitoring the overall situation in the country. They do not take spontaneous decisions on the purchase of shares, they are watching the macroeconomic situation, the stability of the legal framework, regulations, protection of property rights, etc. For example, in Georgia law on entrepreneurial activity changed 45 times in  20 years , and this, of course, does not create a sense of stability. In this respect, there is still a lot to do.

How important is the development of capital markets for the stability of the national currency?

Currency rate depends on macroeconomic factors, but if foreign investors are interested in the acquisition of securities in the national currency, then it certainly will affect positively on the lari exchange rate – there will be demand in the country, more currency will inflow the country to buy the lari.

But all this requires a long-term interest, otherwise a  developed stock market may even worsen the state of the national currency – in the event of an economic shock, investors will rush to withdraw their capital, and it will create additional pressure on the national currency. For example in Russia after the imposition of sanctions, a massive outflow of capital has begun  that  dramatically increased the pressure on the ruble.