LONDON ?€” Georgia is likely to suffer lasting economic damage from its war with Russia, credit ratings agencies warned Tuesday, saying foreign investment might dry up despite a halt in the conflict.
Ratings agencies Fitch and Standard & Poor's both downgraded Georgia on Friday after a Georgian offensive into the separatist region of South Ossetia was followed by Russian air strikes and a much larger counteroffensive.
President Dmitry Medvedev said Tuesday that he had ordered troops to stop military operations, but both agencies said that would not be enough to reverse their downgrades.
"It doesn't look very good for Georgia," Fitch's head of emerging European sovereigns, Edward Parker, said by telephone. "Going to war with Russia is bad for your creditworthiness, to put it mildly."
Fitch had downgraded Georgia to B+ with a negative outlook, while S&P cut the rating to B from B+ and placed the country on CreditWatch negative.
Georgia issued a debut $500 million eurobond earlier this year, but its price has fallen sharply from launch levels.
S&P ratings analyst Trevor Cullinan said he feared foreign investors might stay away.
Foreign direct investment "has been a strong driver for growth in Georgia ?€” we are very concerned that FDI will have dried up," he said. "We are waiting to see what happens when the situation stabilizes. It is not necessarily the political impact we are looking for but the impact on investor sentiment."
Fitch said foreign investment had been key to helping Georgia managing its current account deficit of about 20 percent of gross domestic product but also saw a possible impact on domestic economic demand as well as the currency.
"Clearly there will not be an immediate return to the previous status quo," Fitch's Parker said.
But he said the conflict would have little or no impact on Russia's creditworthiness or that of other countries in the region, although it might act as a warning sign to any investors who had not realized Russia's ability or desire to influence its neighbors.
The European Bank for Reconstruction and Development said Monday that the conflict was likely to slow Georgian economic growth from near double-digit levels.
S&P said Georgia had previously been seen as an appealing business destination.
"Georgia has been one of the best performers in the World Bank's Doing Business tables," said Cullinan. "The issue is whether they will have thrown that away."
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