By Margarita Antidze
TBILISI, Oct 29 (Reuters) - Georgia's summer war with Russia shattered prospects for robust growth, and U.S. and local officials are pressing for economic reforms to woo back investors and reduce dependence on Western donors.
The August war slashed this year's economic growth expectations to just 3.5 percent from 9.0 percent, and spooked investors already wary of emerging markets as a result of heightened global risk aversion and the credit crunch.
"The biggest problem we face is restoring the confidence," said Robert Christiansen, chairman of the Supervisory Board of the independent Financial Supervisory Agency in Georgia.
"There is a need to introduce a number of economic reforms that will make Georgia even more attractive to private investors...I think the government is moving in this direction," he told Reuters, adding that inflows could resume by mid-2009.
Resource-poor Georgia depends on foreign capital to keep the economy growing. It had enjoyed an investment boom since the election of Mikheil Saakashvili's pro-Western government nearly five years ago.
Investors from Turkey, United Arab Emirates, the Netherlands, Russia and others have ploughed capital into banks, construction, tourism, telecoms and transport infrastructure.
Georgia is also important as an energy transit hub, hosting
a section of the BP-led
In the first half of this year, total foreign direct inflows jumped 136.3 percent to $1.7 billion compared to the same period of 2007. For the year as a whole, Georgia had expected to get $3 billion, equivalent to a quarter of its $12 billion economy.
But the five day war -- when Russia sent tanks and troops into Georgia to repel a Georgian bid to retake the pro-Moscow separatist region of South Ossetia by force -- has battered Tbilisi's image as an attractive investment destination.
The area is "now likely to be perceived as a potentially unstable region, subject to clashes in the battle for influence between major powers," said Katya Malofeeva, chief economist for Russia and the former Soviet Union at Renaissance Capital.
"The announced withdrawal of certain investment from the region is a manifestation of this trend."
"STILL SCARED"
In the short term, some of the gap could be plugged by aid -- international donors this month pledged $4.55 billion of aid, the United States has promised a $1 billion economic recovery package and a further $0.75 billion is expected from the IMF.
Such pledges are an expression of support for the Georgian people, government and economy, said John Sullivan, the U.S. Deputy Secretary of the Department of Commerce.
"I believe that the Georgian government is committed to democratic reforms," Sullivan told Reuters in Tbilisi.
Expressions of confidence from the West could be key to reassure investors, who are not just shunning post-war Georgia, but are also fleeing from more developed, more wealthy, and more resource-rich emerging market economies like China or Brazil.
FSA's Christiansen said investors were "still scared."
"That's a critical approach to say to the investors that our plan is to substitute public investment from abroad for private for a period from six months to year," he said.
The donor money though needs to be combined with reforms if foreign investors are to return in the medium to long-term.
Experts cite the need to further simplify trade rules, accelerate the privatisation process, pursue strong fiscal and monetary policies, cut taxes and keep inflation under control.
"There is no question about the continuation of liberal economic policies, and a regime that will be open to foreign investors," said Renaissance Capital's Malofeeva.
"The commitment of international donors to rebuild and upgrade infrastructure is positive. Georgia needs to develop a viable strategy for development, and implement it, in order to sustain high growth rates."
This month Tbilisi announced plans to sell a 24 percent stake in the Black Sea port of Poti and a 60 percent stake in electricity monopoly Georgian State Electrosystems.
Saakashvili named a new prime minister on Monday to replace Lado Gurgenidze, a U.S. educated banker who staged an intense post-war investor relations crusade from Geneva to New York.
Exprts hope his replacement -- the 35-year-old, Oxford-educated Grigol Mgaloblishvili who served as Georgia's ambassador to Turkey -- will also prove investor friendly.
Regaining foreign investor confidence could also be important for Georgia's ambitions to join NATO. Tbilisi has secured a promise of eventual membership of the Western defence alliance, in a move which strained its relations with Russia before the war.
(Editing by Jon Boyle and Andy Bruce)