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Hungary was part of the polyglot Austro-Hungarian Empire, which collapsed during World War I. The country fell under communist rule following World War II. In 1956, a revolt and announced withdrawal from the Warsaw Pact were met with a massive military intervention by Moscow. In the more open GORBACHEV years, Hungary led the movement to dissolve the Warsaw Pact and steadily shifted toward multiparty democracy and a market-oriented economy. Following the collapse of the USSR in 1991, Hungary developed close political and economic ties to Western Europe. It joined NATO in 1999 and is a frontrunner in a future expansion of the EU. 

Update No: 063 - (23/07/02)

Ex-communists return
The Hungarians are digesting the fact that they have a new government; the ex-communists are back. This paradoxically is going to make it easier for Hungary to join the EU and perhaps to attract more foreign direct investment (FDI) into the country, although, as we shall see, new difficulties are emerging here. The previous government were lukewarm about the EU, although not totally opposed and also about FDI.
The more supposedly left-wing governments in Central Europe are often the most pro-market, while the nationalist right-wingers, Fidesz in Hungary, the Civic Democrats in the Czech Republic are full of reservations.

Bizarre spying scandals
A problem with the new government is that has a leader, premier Peter Medgessy, who has admitted that he worked for counter-intelligence in the communist period. This is not such a grave charge any more in Hungary and there is so far no question of his resigning. But he did commit an impropriety by previously lying about it to parliament. 
Curiously, a leader of the new opposition, Fidesz, has felt that he should resign and has done so because of the revelation that his father was a police informer in that period. This is certainly a bizarre double standard. It is true that Janos Pokovni, 74, the father of Zultan, the Fidesz leader, was a police spy for the entire 1956-89 period, whereas in the premier's case it was only for a five-year period in the 1980s. But after all he was an informer, which Zultan Pokorni himself never was.

Economy grows rapidly
The new government has inherited a basically sound situation in the economy. GDP has been solid for several years, averaging 4-5% annually, while inflation is on a declining trend. 
The government would like to encourage FDI as the main engine of future growth, as it has largely been to date since independence in 1989.

Problems with FDI
Budapest has a cosmopolitan atmosphere and outlook. Its versatile and inventive people, renowned for technical flair, offer an ideal workforce for multinational companies wanting to set up in the heart of Central Europe. The total stock of FDI to date exceeds US$27bn, which puts its per capita rate of FDI at over US$2,700 per head, the highest figure in the former communist world.
But there are problems. Hungry is falling behind in the FDI race. There is a shortage of skilled labour developing, wages are rising and changes to corporate tax-free holidays are attendant upon EU entry. FDI in the first three months of this year was only US$181m, a mere 20% of last year's in the same period. FDI world-wide is running about under 50% of last year's, as depression is feared, the financial scandals in the US and sluggish growth in Europe being responsible.
But in Hungary's case there are special factors adversely affecting the situation. The Czech Republic has been seen as more friendly to foreign investors of late under the Social Democrats than Hungary under its centre-right Fidesz. The ex-communists could perhaps redress this impression.
But there is a new trend developing for multinationals to look further afield than Central Europe, to the Far East and Turkey. The days of FDI-driven growth in Hungary may be over. 

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Konzumbank to go on sale

Hungary's new government is planning to revive plans to sell commercial bank Konzumbank Rt, a top government official said recently, Budapest Business Journal has reported.
The sale of Konzumbank, planned but called off several times by the previous government, is expected to draw the interest of institutions including Erste Bank Rt, the Hungarian Foreign Trade Bank Rt (MKB) and the country's biggest insurer, Allianz Hungaria Insurance Rt.
Currently, Konzumbank is 97% owned by the state-owned Hungarian Development Bank Rt (MFB). "We may be interested," Allianz Hugaria spokesman, Josef Sipos, said recently.
The Germany-based Allianz group has recently pursued a strategy of teaming up with banks in order to expand its retail network and seek other synergies. In Hungary, it has a 5% stake in Takarekbank Rt, an umbrella bank for saving cooperatives that boasts more than 1,000 branches countrywide. Allianz merged last year with Dresdner Bank, whose local subsidiary, launched last year, focuses on corporate banking.
Istvan Sebestyen head of strategy and business development at German-owned MKB, said recently that the bank intends to examine all acquisition opportunities that emerge, checking whether the bank in question fits into its strategy. He declined to give more details of MKB's plans regarding Konzumbank MKB is Hungary's third-largest commercial bank.
For its part, Erste Bank is eager to expand on the domestic banking scene. Although CEO, Peter Kisbenedek was not available for comment, he confirmed during an interview with the Budapest Business Journal in February that the bank had made a bid in the last round of the privatisation attempt for Konzumbank.
"We are looking at opportunities all the time, on high alert," Kisbenedek said at the time. "If there is anything up for sale in Hungary in retail, we'll be there as a bidder."
Erste Bank bought some branches of savings cooperative HBW Express last year. Its Austrian owner has an ambitious goal of having the mid-sized Hungarian bank reach 20% share of the retail market in 2005 through organic growth and acquisitions.

OTP eyes biggest Romanian bank 

OTP Bank Rt has written to express its interest in participating in the privatisation of Romania's largest commercial bank, Banca Comerciala Romana SA (BCR), sources familiar with the situation said recently, the Budapest Business Journal has reported.
While the communications department of OTP, Hungary's biggest bank, declined to comment on the matter, the bank earlier said it aims to continue expanding in the region. It confirmed in May that it is eyeing a 67%-100% stake in Bulgaria's third largest commercial bank, Banka DSK. OTP bought a bank in Slovakia last year.
The Romanian government plans to sell 70% of BCR by the end of this year, according to press reports. Strategic bidders may offer to purchase 52% of the bank, while the European Bank for Reconstruction and Development (EBRD) and the International Finance Corp., the World Bank's investment arm, are likely to have a chance to purchase a combined 10%. The other 8% is expected to go to BCR employees.
BCR was accepting expressions of interest until 22nd June. Besides OTP, international giants such as Austria's BA CA, the Dutch ING Bank, Hong Kong-based HSBC, a French bank and a US bank are reported to have expressed interest.
The Romanian government has estimated the market value of BCR at US$800m-US$1bn. That values the 52% stake at US$416m-US$520m.

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MFB tells MOL it won't buy loss-making gas unit

Hungarian Development Bank (MFB), which is majority owned by the state, advised local oil and gas company MOL that it has no plans to discuss the potential acquisition of MOL's unprofitable gas unit, MOL said in a statement, cited by Bluebull. 
MFB secured exclusive talks with MOL to purchase a controlling stake in the latter's gas unit four months ago. Meanwhile, MOL said it would continue to carry out its known strategy in connection with MOL's unit, but would consider making some changes.

US energy company sheds Hungarian firms in continental asset sell-off 

US-based NRG Energy Inc. has put its Hungarian subsidiaries on the block as part of an attempt to sell its mid-continental assets, following the company's woes on its home market, Budapest Business Journal has reported.
Bids for the portfolio of eight companies, including its Hungarian subsidiaries Csepelpower Generating Kft, Csepel Power Staiton Kft and NRG Energia Kft, were due on 19th June. 
"We are marketing our European assets but we do not disclose information on specific asset sales," said Lesa Bader, spokeswoman for NRG Energy Inc. Besides the local subsidiaries, the package also contains energy companies in the Czech Republic and Germany.
The Hungarian subsidiary of France's Electricite de France, widely expected to bid for the assets, also turned down a request to comment on the deal.
American energy giant, NRG, decided earlier this year to put its non-US asserts up for sale after its position was shaken following terrorist attacks in the US on September 11th, the collapse of energy giant, Enron, and the downgrading of NRG's credit ratings. NRG has lost two-thirds of the value of its shares from a year ago.
"The independent energy market is not what it was a year ago," said Allan Walmsley, director of asset management at Csepel Power Generating Kft. "NRG, along with other such companies, has been struggling in terms of market credibility."
American power company, Xcel, took closer control of NRG through buying a 26% stake, upping Xcel's holding to 96% in a deal that was concluded recently. The parent has followed a policy of concentrating on the US market.

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Samsung launches picture tube facility in Hungary

Japanese electronics group Samsung opened a new facility in God (northern Hungary) for the production of picture tubes, according to Econews. Samsung paid out US$80m to open the plant, which has a staff of 700. The plant has an annual production capacity of 2.6m picture tubes, the majority of which is earmarked for export. The facility will be expanded within the next three years, the company said in a statement.

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Hungary's pharmaceuticals eye regional expansion

Two of Hungary's largest drugmakers floated regional expansion plans recently. Top player, Richter Gedeon Rt, may finalise the buyout of a 58% stake in Polish drug company, Polfa Grodzisk SA, in the near future, and French-owned Egis Rt is rumoured to be participating in the acquisition of Romania's third largest pharmaceutical firm, Terapia.
Richter could ink the deal with Polfa in the near future, Polish Treasury Minister, Wieslaw Kaczmarek announced recently at a press conference, Buddapest Business Journal has reported. The Polfa buyout would be the largest acquisition so far in the history of Richter, which has been planning a major foreign acquisition for years.
Richter Communications Director, Zsuzsa Beke, however, declined to confirm press reports about the impending purchase, saying the company only comments on done deals.
Richter earlier confirmed that it had bid for Polfa, which is located near Warsaw, in order to boost sales on one of its largest export markets. The company did not deny press reports that it would be willing to pay 125m zlotys (US$30m) for a 51% stake in Polfa, and would purchase an additional 7% package held by employees for 18m zlotys. Richter would spend 75m zlotys on investments and upgrades at the company.
Polfa is a mid-sized, profitable drug manufacturer that was left out of the first round of Polish privatisation in 1997-1998. The company's product portfolio fits Richter's, which analysts say might allow production and R&D synergies.
Meanwhile, Servier SA, the French owner of rival drugmaker Egis, is said to be interested in buying a 17% stake in Terapia, put on the block by the Romanian Investment Fund, one of the largest venture capital funds targeting Romania.
Due to similarities between the product portfolios of Terapia and Egis, analysts speculate that Egis itself may also be involved in the acquisition. The company's key products include heart and circulatory drugs, as well as antidepressants.
"I think that a Romanian expansion would make sense in Egis' case, since Romania is one of the fastest developing markets for Egis," said Olah of UBS Warburg.
Beside Servier, a French and a Greek drugmaker have also signalled interest in buying into Terapoa. Based on its stock price, the value of the Romanian company is estimated to be around US$46m.
Servier and its Hungarian affiliate have already acquired one other drugmaker jointly. A few years ago, Servier bought 60% of Poland's Anpharm, while Egis acquired 23%.

Production starts in new GlaxoSmithKline vaccine plant 

GlaxoSmithKline Biologicals, the British-American pharmaceutical company has started production in a recently acquired and upgraded vaccine production plant in Gödöllö, east of Budapest, CEE News has reported. 
The company bought the plant from Israeli Teva subsidiary Human Rt and plans to develop the factory into a leading producer of diphtheria, tetanus and pertussis vaccines by 2005, using an investment of GBP 10 million. GlaxoSmithKline expects to eventually export 95% of its production. 

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Tesco-Global department opens doors in Herceghalom

Herceghalom (western Hungary) is the site of the new HUF 6bn logistics base opened by Tesco-Global Department Stores. The Hungarian centre will be completely radio controlled, a state-of-the-art system for the region, according to Econews. 
The British company is preparing to open another five shops in Hungary. Tesco-Global said this year's turnover should grow to HUF 280bn from HUF 188bn.

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