CAPITAL MARKET CHALLENGES AND DEVELOPMENT PREREQUISITES IN GEORGIA
Authors: Tokmazishvili Mikheil 
Published: August 2020

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 trends­of­development­of­capitalization­are­presented.
The­ formation­ of­ capital­ market­ is­ a­ long­ process.­ It­ requires­the­formation­of­financial­instruments,­consolidated­ legal­or­model­norms,­market­infrastructure­and­institutions.­ 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.­The­banking­sector›s­ability­to­finance­the­economy­ 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 any­alternative.
The­paper­analyzes­the­causes­that­impact­on­local­capital­ 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 ­examining­of­economic­ literature ­are ­presented.­
The­ strong­ institutions­ and­ the­ well-functioning­ legal­ system­ are ­important­ for­ local­market­ development,­ as­they­ 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,­ there­is­the­different­view­about­the­need­for­regulating­the­ securities­market.­The­initial­studies­argued­that­the­securities­ market­ may­ not­ be­ regulated,­ but­ according­ to­ the­ recent­ researches,­the­regulation­is­essential­for­private­contractual­ framework­standardization­and­fraud­prevention.­Today­it­is­ widely­ recognized­ that­ the­ laws­ of­ securities­ are­ critical­ to­ the­development­of­the­capital­market;
Finally,­ the­ article­ proposes­ the­ structure­ of­ market­ prerequisites­ that­ bases­ on­ several­ piles:­ macroeconomic­ stability,­ institutional­ and­ legal­ system,­ market­ size,­ market­ composition­and­pension­system,­transparency­and­financial­ infrastructure.­Despite­the­absence­of­institutional,­legal­and­ infrastructural­barriers,­many­economies­are­unable­to­attract­ investors­ in­ order­ to­ ensure­ the­ optimum­ level­ of­ capital­ market­and­efficient­liquidity.­In­this­regard,­the­compulsory­ pension­ systems­ are­ introduced,­ which­ is­ an­ opportunity­ to­ attract­ the­ long-term­ instruments­ of­ investment.­ It­ is­ the­ condition­of­the­development­of­the­local­bond­market.­With­ the­ liberalization­ of­ financial­ markets­ and­ in­ the­ effective­ regulatory­environment,­investments­in­the­state­bonds­that­ dominate­ in­ Georgia­ today­ will­ be­ added­ by­ expansion­ of­ the­corporate­private­bonds­market.­Similarly,­the­derivative­ markets­ cannot­ be­ developed­ without­ a­ well-developed­ market­and,­in­turn,­they­will­contribute­to­the­development­ 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 rate­that­will­support­the­development­of­the­bond­market.