EBRD sees Georgia economic fallout from war

A Georgian man sits in front of his damaged home in Gori. some 80 km (50 miles) from Tbilisi, August 11, 2008.

LONDON (Reuters) - Georgia's economy is likely to slow from near double-digit growth this year because of its conflict with Russia, a European Bank for Reconstruction and Development official told Reuters on Monday.

Michael Davey, the EBRD's director for the Caucasus, Moldova and Belarus, said it was too soon to estimate the overall impact on the Georgian economy, but added that prolonged war would be disastrous.

However, he said that if recent events led to a resolution of Georgia's long-standing border disputes with Russia, this could make the country more appealing to foreign investors.

"It (prolonged war) would be disastrous because the government has been very successful at turning an unappealing investment destination into an attractive one, and if that was undone it would be a serious setback," he said by telephone from the Georgian capital Tbilisi.

A simmering conflict erupted last Thursday when Georgia sent forces to retake the breakaway territory of South Ossetia. Moscow responded with a counter-attack that drove Georgian troops out of the region on Sunday.

The Georgian economy grew 9.3 percent in the year to March, a source in the Georgian ministry of economic development told Reuters in July, a fall from 11.4 percent the year before.

Economic analysts and government officials say that a political crisis at the end of 2007, when opposition protests led to an early presidential election, scared off investors some of whom might have already been deterred by political risk.

"The frozen conflict in South Ossetia has always been a worry for foreign investors in Georgia and if that is ultimately removed as a result of this, it could become more appealing," Davey said. "If there is a final conclusion then the slowdown may not be that pronounced ... but there will be one."

INFRASTRUCTURE STILL INTACT

The conflict could affect other regional countries, particularly Armenia and Azerbaijan, due to transport disruption but goods continued to move through Georgia, he said.

"For now, the roads are operating well and the roads are moving, although there may be more security delays at borders and there are tanks on the roads so they may cause delays," Davey said. "Obviously a conflict will have some impact on investor perception of the Caucasus but it should be limited."

He said infrastructure damage from Russian bombing and shelling in Georgia outside South Ossetia had largely been confined to military targets and there did not seem to be a need for a major post-conflict rebuilding program.

Credit ratings agencies Fitch and Standard & Poor's downgraded Georgia on Friday after the conflict began.

Davey said before the conflict started, the country's primary economic issue had been covering its current-account deficit, one of the widest in Europe at some 20 percent of gross domestic product, as well as tackling inflation.

"Foreign investment had been covering the current account deficit but of course this could make that more difficult," he said.

He said the relatively sudden recent influx of foreign investment into Georgia made it difficult to compare it with other countries that had suffered other sudden bouts of conflict such as Kenya, which also saw a sudden economic slowdown on the back of unexpected violence earlier this year.

"Drawing on other examples is difficult," he said. "Kenya probably had more sustainable sources of income than Georgia does."