Issue 6, 2012. December-January



The Georgian Stock Exchange, established in 1999 as part of the USAID Capital Market's Development Project, currently trades 133 companies. Giorgi Loladze, chairman of the Supervisory Board of Georgian Stock Exchange (GSE), speaks with about the capital market in Georgia today and its potential for the economy.

Maia Edilashvili

Q: What is the best role that the stock market can play in Georgia's economic growth?

A: A well-functioning securities market is very important for the stable development of any economy. Unfortunately, in the majority of post-communist countries, the development of the financial sector has been marked with the dominance of commercial banking. And Georgia is one of the best examples of this. Such disproportion lays the foundation of problems which are typical to such economies: limited access to financing for businesses, which translates into high interest rates on loans and a general scarcity of credit resources. At the same time, unlike the post-communist countries, in developed economies...the stock market, as an alternative fund-raising vehicle, competes with bank loans and such healthy inter-sector competition naturally forces commercial banks to reduce interest rates on loans...The low capitalization of companies imposes a natural limit on the availability of loans as well. So, without the development of a stock market, the economic growth of any country is limited.

I believe that, despite today's unimpressive picture, if there is proper policy support and economic development...GSE has significant potential. Our foreign colleagues always note that GSE is actually the only stock exchange which has achieved major progress without any policy support or other assistance from the government.

Q: How would you evaluate GSE's performance at present? What are the factors which influence the financial outcome in general?

A: Currently, activities at GSE are quite sluggish. As a rule, election periods are always difficult. A similar situation was found in 2003, although in 2004, GSE turnover increased 30 (!) times... Now the total market capitalization is circa $1 billion and the daily turnover is about $ 2,000. The period between 2004 and 2007 was the most fruitful, when market capitalization and liquidity reached its peak. The number of trade sessions increased and a number of successful IPOs were made; the most notable is the Bank of Georgia. Unfortunately, in 2008 the situation started to deteriorate sharply, largely due to the amendment to the Law on Securities Markets that legalized OTC trading in securities listed at the stock-exchange. OTC trading, or over-the-counter trading, means that a stock that is normally traded on a stock exchange is now traded between two parties outside of the exchange. That move pushed most of the trades on securities out of GSE - from a competitive environment into a non-competitive "gray" area. That decision also undermined the possibility of objective market price-finding, and halted liquidity and infrastructure development for the stock market.

Q: What are the challenges and obstacles for the Georgian Stock Exchange today?

A: This is similar to any complex system: if even one small part of such mechanism doesn't work, the whole system fails. However, this shouldn't discourage anybody from implementing such essential systems. In the case of the Georgian securities market, many parts of the puzzle are in place - such as basic securities market infrastructure, legislation, and regulation. However, together with the fine-tuning of the above components, significant economic policy decisions should be taken to complete the puzzle. These are issues like pension system reform, privatization, state investments, tax code, government securities etc. Let me elaborate on just one of them - pension reform. Institutional investors "long" money is essential for any securities market. And introduction of the Mandatory Savings Pension System (so called Pillar II) is an important step in this direction.

Really, mandatory pension contributions to the pension fund(s) should be efficiently invested in different financial instruments. And the stock market is one of the most important such vehicles. At the same time, the existence of such large pools of money will encourage potential local issuers to create IPOs and attract investment through the stock exchange. This will be a win-win situation for all: pensioners will be entitled to adequate pension benefits, companies will have access to "long" money, and a broad range of retail investors will benefit from a liquid and vibrant capital market.

I mentioned above the major loophole in the securities trading regulation and, unless it is corrected, it will be impossible to ensure the proper liquidity of the market. Another important issue is the institutional development of the major market participants - brokerage companies. Brokerage companies are the most important actors on the market that are organically interested in facilitating IPOs and the functioning of the liquid securities market...Currently, we are discussing all the above issues with the new government and hope for a fruitful cooperation with them.

Q: Compared with the world and regional markets, how would you assess GSE?

A: There is no simple answer to this question. We have the Georgian Stock Exchange, the Georgian Central Securities Depository and other securities market infrastructure— all well developed from a technological and regulatory point of view, but we have very few attractive instruments to trade, and the liquidity of the market is very low.

As for our stock exchange index GSX: we believe that it adequately reflects the situation in sectors present on GSE. That said, I would welcome more Georgian companies joining us. As for our closest neighbors, Armenia and Azerbaijan, they have no stock market index so far because mostly government securities are traded on their markets and the corporate sector is very weakly represented there. Our situation is completely the opposite.

Q: In 2007, NASDAQ OMX expressed interest in buying GSE but the talks failed. Can you tell us if the interest still exists today?

A: I will tell you openly that the interest from NASDAQ OMX towards GSE is still there. Our visions, in terms of developing the Georgian capital markets, coincide and I believe that if the government makes policy decisions favoring securities market development and the implementation of pension reforms, NASDAQ OMX will be happy to participate in the process. By all means, this will be extremely beneficial for the Georgian securities market and for the Georgian economy as a whole.