Role of Stock Exchanges in Economic Development of Uzbekistan

The paper is devoted to study the contemporary role of investments to economic development in the context of Uzbek stock exchange. The comparative analysis of economic development and stock market trends in Uzbekistan, Kazakhstan and Russia for the period of 2000-2015 are conducted using documentary analysis, quantitative and qualitative analysis, and other statistical methods of research. The results reveal that Uzbekistan has made notable change in regulation and improvement of investment climate and has stable economic development trends for the studied period. However, Stock market development in Uzbekistan remains weak and recent government effort to accelerate privatization is expected to boost the market and support foreign investments attraction.


Introduction
The importance of investment for economic growth has long been recognized. Investment in a nation's capital stock may contribute to increased productivity and hence stronger economic growth in the medium term. This holds true for both the formation of tangible fixed assets such as machinery and equipment, and intangible assets originating from investment in research and development (Kolev, A., Tanayama, T., & Wagenvoort, R., 2013). Furthermore, theory and evidence imply that better developed financial systems ease external financing constraints facing firms, which illuminates one mechanism through which financial development influences economic growth (Levine, R., 2005). It should come as no surprise then that investment is suppressed when finance is unavailable, and that economies perform badly when financial sectors underperform. In contrast, a well-functioning and developed financial sector can boost economic growth.
According to a recent study by the European Commission this stable long-term relationship between investment and economic activity broke down in 2008. Since the beginning of 2008 investment rates have declined appreciably across the EU-27. This decline has been larger than could have been predicted on the basis of the historical relationship between investment and GDP. There, gross fixed investment relative to GDP has declined by about 7 percentage points compared with the 15-year pre-financial crisis average (EC, Quarterly Report on the Euro Area. 2013).
The research shows that falling demand for natural resources and collapse of oil prices combined by recent monetary policies in advanced economies have undermined the growth prospects of developing countries (Stiglitz, J., & Rashid H., 2016). As a result all Central Asian countries including Uzbekistan have faced the challenges of global and regional negative factors.
The objective of this publication is to provide an analysis of investment in connection to economic growth. Problems in current investment climate and the ways to support the stock exchange market in Uzbekistan were researched in the context of attraction of foreign investments. To reach this goal economic growth, investments, stock exchange performance in Uzbekistan is studied in comparison with other emerging countries such as Russia and Kazakhstan.
We begin by discussing current development trends, investment climate, and analyze the structure and main indicators of Uzbek stock exchange before assessing the impact of the government regulation.
The government of Uzbekistan declares that attracting foreign direct investment is core priority and there were more than 50 legislative documents issued to accelerate and coordinate investment processes. The legislation provides a wide range of guarantees to investors, including: protection against discrimination, protection from harm caused by retroactive implementation of legislation, protection from interference by the state in the economic activity of foreign investors, and protection from any changes in legislation that worsens foreign investment conditions .  The study shows that the overall business climate may be described as stable, but with a potential for rapid growth in the event of more radical reforms towards privatization and reduced state regulation of the economy.
Uzbekistan could keep stable rates of capital investments during and post financial-crisis period, which allowed beginning to modernize of industry and diversify of the economy. In contrast, the rates of capital investments in Kazakhstan were more volatile and reduced to about 24% of GDP in 2014, comparing its peak period (35% in 2007). Also, Russian economy badly hurt by Western sanctions fell behind to Uzbekistan with about 20% of GDP in 2014 against 25% of GDP in Uzbekistan for the same time (figure 2).
However, the Western sanctions to Russia (which is the main trading partner of Central Asian countries) severely damage foreign currency inflows to Uzbekistan and government plans to fill this gap through massive privatization program. The figure 3 shows increasing volume of FDI in Uzbek economy. In the absence of reliable data on portfolio of foreign investments the figure represents general positive trend.
1 Prepared by the author on the bases of www.theglobaleconomy.com data.

Analysis of Uzbek Stock Market
The stock exchange in Uzbekistan is in the stage of formation. With the recent legislative changes to improve regulation of corporations and corporate governance government want to accelerate reforms and decrease state participation in economy.
Stock market capitalization of about 50 percent of GDP and more is an indication of a well-developed stock market (www.theglobaleconomy.com). Yet, in most countries the stock market almost does not exist and it's close to zero.
The stock market capitalization is calculated as the number of shares traded on the stock exchange times their prices. It is a measure of the size of the stock market in the country. It is usually reported as percent of GDP so that we can evaluate the size of the stock market relative to the size of the economy.
The figure 5 compares stock market capitalization rate of Uzbekistan, Kazakhstan and Russia. However, the data for Uzbekistan provided only till 2006 and the stock market capitalization rate is about 4% of GDP which is still remains low comparing the other two (OECD, 2012). Stock market turnover ratio   and an an of the total turnover or 94.7 bln.UZS (Figure 9), or the absolute turnover of this market rose almost 3 times in comparison with the year 2014 (32.2 bln.UZS). Figure 9. Stock market structure, Uzbekistan 10 The analysis of stock exchange indices from the categories of investors, it should be noted that the volume of investments of legal entities is a major part of the exchange turnover -95.0 bln. UZS or 81.8% of total turnover. At the same time, a slight decrease in investment activity from individuals, whose share in the stock exchange turnover amounted to 18.2%, or 18.6 bln. UZS.
Analysis of IPO market results that 7 out of top 10 IPO are made by banks and this situation can be explained by remaining high interest from investors to this sector (table 2). For instance, 93.1% of investors preferred banks securities in 2015, while this data for 2014 was 93.4%. The study of sectorial structure of stock markets is also important, because it's a good indicator showing how stock market represents the whole economy. Thus, the study considers the sectorial structure of Uzbek stock exchange in 2015 (figure 10). It reveals that bank securities were the most traded assets for the 2015 totaling 87.8% of all trade, followed by agroindustry sector with 7%. And, all other sectors of economy even could not made 5% of trades. This evidence's previous studies (Burkhanov U., Maitah M. & Amonov Kh., 2015) that the economy lacks of well diversification and need further reforms towards to market liberalization.

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