(Adds quotes, background)
By Margarita Antidze
TBILISI, Jan 28 (Reuters) - Georgia's economy is expected to grow 2 percent in 2009, slightly up on 2008, and inflation is likely to drop to 3-4 percent as the country wrestles with the global financial crisis, the central bank said on Wednesday.
The Caucasus country was hit hard in 2008 by a five-day war with Russia in August and the onset of the financial crisis, but analysts say its relatively small economy could be better placed than others in the ex-Soviet region to ride out the storm.
"We expect the Georgian economy to start growing in the second half of this year," central bank acting president David Amaglobeli told Reuters in an interview.
"We forecast GDP growth by the end of this year at 2 percent," he said, adding that growth in 2008 is estimated at 1.5 percent.
The Georgian economy grew more than 12 percent in 2007 on the back of foreign investment attracted by the pro-Western government of President Mikheil Saakashvili.
But the war -- when Russia repelled Tbilisi's military assault on separatists in South Ossetia -- scared off investors just as the financial crisis began to take hold, compounding the political pressure on Saakashvili over the conflict.
"We can say with high probability that inflation will decline to 3-4 percent in 2009 ... end-period annual inflation in 2008 was 5.5 percent," Amaglobeli said.
The bank acting president said he expects to see a decline in imports and exports over the coming year, but for foreign capital inflow to partially recover.
INVESTOR CONFIDENCE
"We expect a fall in exports as well as imports in 2009 due to the decline in demand as well as prices on the main export and import products. Imports will decline by 20 percent in 2009, and exports by 30 percent," he said.
"I think that despite the shocks, foreign capital inflow into Georgia will continue. According to our forecasts, it will reach more than $2 billion in 2009, although it is 25 percent less than last year."
Amaglobeli said there was still work to do to restore investor confidence, with Georgia's two rebel regions -- South Ossetia and Abkhazia -- occupied by thousands of Russian troops and their fragile ceasefire frequently tested.
Georgia was offered $4.5 billion in conditional aid after the war. The International Monetary Fund also approved a $750 million standby loan in September, of which Tbilisi has so far received $250 million. "The main risks facing the Georgian economy in 2009 are the problems in restoring investor confidence shaken by the August events and the global financial crisis," Amaglobeli said.
He predicted limited economic and investor activity in the first half of 2009. "... everyone wants to understand where the global economy is heading. But I think we (Georgia) have already passed the most difficult stage."
The Georgian lari currency fell 13 percent against the US dollar in November 2008, and has since been fluctuating between 1.65 and 1.67 to the dollar.
Amaglobeli said he did not expect major currency fluctuations in 2009.
"The central bank monetary policy in 2009 will be flexible and soft," he said. "We want the national currency rate to be flexible and the market to find the rate's equilibrium by itself." (Writing by Matt Robinson; Editing by Ron Askew)