(AFP) – Aug 11, 2008
PARIS (AFP) — Georgia has a lot to lose on the economic level due to its conflict with Russia, which could scare off foreign investors and bring an end to a period of very strong growth, analysts say.
"The economic damage is regrettable for a country that has worked hard in recent years to improve the economic well-being of its population," the 185-nation International Monetary Fund said late on Monday
Trevor Cullinan, an analyst at ratings agency Standard and Poor's (S&P) which reduced Georgia's credit rating to B from B+ late last week as armed conflict exploded, told AFP the conflict could "scare off" foreign investors.
"Foreign investors, who have played a key role in the country's good performance, could be scared off," he said.
The World Bank, however, on Monday expressed "...its confidence in the country's strong economic fundamentals ... at this extremely critical time for Georgia..."
Georgia has "strong economic fundamentals, including ample foreign reserves, prudent monetary and fiscal policy and wide ranging financial sector reforms that has lead to a strengthened banking sector that today is both liquid and solvent," the Bank's Tbilisi office said in a statement.
The bank has already committed a billion dollars to Georgia, was considering lending a further 300 to 350 million dollars to the country over the next 12 months, and was ready to stand by the country's four commercial banks, it said.
After the difficult years of transition and the conflicts which followed its independence from the collapsing Soviet Union in 1991, Georgia has been living through a veritable economic boom.
Since the Rose Revolution of 2003 swept the pro-Western President Mikheil Saakashvili to power, the country has become one of the most dynamic countries in the former Soviet Union.
Numerous reforms have begun to bear fruit, and have been hailed by international financial institutions like the World Bank.
Georgia's growth stood at more than 10 percent in 2006 and 2007 and is expected to be around eight percent this year.
The country's economy is largely based on agriculture, which represents 30 percent of gross domestic product, but the manufacturing, construction and telecommunications sectors are developing too.
Ideally situated between the Caspian Sea and the Black Sea, Georgia has become a key point of passage for transporting oil and gas from central Asia, bypassing Russia and Iran, netting it sizeable revenues.
Since the entry into service of the Baku-Tbilisi-Ceyhan pipeline in 2006 Georgia has been fast becoming a "regional platform for transporting energy," Cullinan said, even though Georgia has no oil and gas resources of its own.
The "BTC", which is expected to transport one million barrels of oil a day by 2009, has allowed Georgia to reduce its energy dependence on Russia by increasing its supplies from Azerbaijan.
Something which does not please Moscow. Relations between Russia and Georgia have disintegrated since the arrival in power in 2004 of Saakashvili.
In 2006 Moscow suspended its air, sea and land links and the sending of postal orders towards Georgia and imposed an import embargo on different products.
While the country has withstood the sanctions well, the hostilities which started on Friday threaten its still fragile development.
Inflation remains high at eight percent per year, its public accounts are in a chronic deficit, corruption is endemic and most of Georgia's population live in poverty.
"Higher arms spending than planned can also endanger the government's budgetary consolidation objectives," Standard and Poor's said in a statement.
Georgia's strategic location could also been weakened, analysts warn.
"Through its substantial military operations Russia also sees an opportunity to show that the region is not sound for future pipelines," said Isabelle Facon, a researcher for the Fund for strategic research.
Russia has bombarded Georgia's main port of Poti, without causing any apparent serious damage.
Russia also risks seeing its own image damaged vis a vis foreign investors due to the conflict with Georgia and its trade relations with the European Union and the United States cool off, even though Moscow holds a hefty weapon of persuasion in its immense energy resources.
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