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hungary

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  HUNGARY

REPUBLICAN REFERENCE

Area (sq.km)
93,200

Population
10,106,017

Capital
Budapest

Currency
Forint

President
Ferenc Madl

Private sector
% of GDP

60%

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Background:
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: 062 - (20/06/02)

The Hungarians elected a new government in May. They now have a Socialist-led coalition government. Premier Peter Medgyessy, a former finance minister, was elected in parliament to his post on May 27th. His most important minister is his own finance minister, Csaba Laszlo, who has to deal with an inflated budget deficit of HUF 678bn (2.8bn Euros) up from the figure of HUF 505.5bn estimated by the outgoing government of Fidesz, led by Viktor Orban.
The four-year stint of Fidesz was not unsuccessful and they were only narrowly defeated. They could well be back. It is not at all like the rout which Solidarity experienced last year in Poland, leading to their political extinction.

The Socialist Thatcherites
The Socialists or ex-communists were in before and proved to be staunch Thatcherites then. They will need to be tough on social spending, as they were beforehand.
Paradoxically, they are keener on the EU and on foreign direct investment (FDI) than the more conservative Fidesz. This is a familiar pattern, the resurgent Vaclav Klaus, the Czech conservative , also having his reservations about them.

FDI not so high
This four-year caution on FDI partly explains no doubt that Hungary, which was the front-runner in attracting it in the early and middle 1990s, slipped back in the international tables in the last few years. FDI was US$1.1bn in 2000 and 2.204bn in 2001. It is reckoned to be coming in at US$1,502m in 2002. The latter figure compares with US$7bn apiece for the Czech Republic and Poland this year.
The growth of GDP also somewhat tapered off of late. In 2000 it was 5.2%, a figure reminiscent of the vigorous 1990s when 5% was the norm. In 2001 it dipped to 3.8% and is due to come in at 4% in 2002.
This is still respectable growth, just as FDI is coming in all the same. But the wonder years of the Hungarian growth look like being over. The new government has little room to privatise, most state assets having already been sold off. A reining in of inflation, still too close to double figures for comfort, will require retrenchment if Hungary is to join Euroland soon after EU entry. But the future still looks rosy. 

Internal problems of the coalition
The coalition between the ex-communists (MSzP) and the liberals (SzDSz) is like to be more difficult to sustain than in 1994-98. They got along reasonably well in those days, but then the SzDSz was not needed to ensure a majority, it was there to make the MSzP look more convincing as a reformist party totally committed to democracy.
This time it is very much needed, its 20 seats giving the socialists the majority. The SzDSz will consequently have real leaverage. One consolation is that any failure to deliver can be blamed on the need for a coalition.
The pattern of one term government seems definitely established in Hungary. This is why Fidesz far from being despondent at the outcome are taking opposition as temporary, a chance to recharge their batteries before returning to power in 2006 Time will tell if their optimism is justified.

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AGRICULTURE

New Hungarian farm minister says no money for farmer loans 

With the lack of certain data, it is not yet possible to assess the exact financial position of the Ministry of Agriculture, Hungarian Radio has reported. It is clear, however that there is no money for the farmer loan programme [preferential or often free loans for family farmers] in the second half of the year. This would need at least 6bn forints [one dollar is about 280 forints] from the budget reserves, Imre Nemeth, the agriculture minister has said after the ministry's handover by the outgoing minister.

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AUTOMOBILES

Suzuki to inject US$52m in Hungary plant 


Japanese carmaker, Suzuki, announced it would increase its annual production capacity in Hungary from 85,000 to 120,000 units within the next three years, New Europe reports. 
The company is prepared to inject HUF 14bn (US$52.28m) into the Hungarian plant by end-2002, according to Chairman, Osamu Suzuki. He added that investments should increase little by little by 2005. Since setting up the Hungarian plant in 1992, Suzuki has spent HUF 120bn on the unit. "This year's HUF 14bn planned investment will go into production equipment in our existing plant," Suzuki said.

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BANKING

K & H hopeful for smart card debut 

Not content with being the leader on the corporate market, K&H Bank Rt is striving for a key presence on the retail banking market as well, Deputy CEO, Edit Varkonyi, said recently, Budapest Business Journal has reported. 
Smart cards, of which K&H became Hungary's first issuer in late May, will change the face of retail banking and will become unavoidable for the rest of the banking sector, Varkonyi added.
K&H plans to gradually replace its 500,000-700,000 cards this year and will also upgrade 600 of its 7,000 POS terminals to accept the smart cards. By the end of 2004, every ATM and POS terminal run by K&H will accept the new cards.
The smart card project has already cost "many hundreds of millions of forints," with more investments to follow, Varkonyi said without elaborating further.
Card operator, Visa International, whose Visa Electron cards are the first in Hungary to feature the microchip, has contributed an undisclosed amount to K&H's investment.
K&H has 270 cash machines and 7,000 POS terminals. The bank plans to gain new ground on the retail banking market primarily by expanding its electronic distribution channels rather than by enlarging its branch office network, Varkonyi said.
By year-end, K&H's smart cards will be able to perform new functions such as verifying electronic signatures, registering loyalty points and enabling customers to make small purchases with the electronic purse function.

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FOREIGN ECONOMIC COOPERATION

Hungarian, Russian state banks signed deal to promote bilateral trade 

The Hungarian Export-Import Bank has signed a cooperation agreement with the largest state bank of the Russian Federation. Edit Szentgali of Hungarian Radio reports that the significance of the signing lies in the fact that Hungarian exports to Russia will become more secure in financial terms. The Hungarian bank will grant credit to the exporters while the Russian bank will provide guarantees...
Since 1998, following the Russian economic crisis, Hungarian-Russian economic relations have deteriorated but now there is some hope for their revival. The invitation to the Hungarian prime minister to visit Moscow could be a good omen...
Experts at the Russian bank expect Hungarian participation primarily in hotel reconstruction and the building of food-processing plants.

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INFORMATION TECHNOLOGY

Fathom secure €1m investment, plans regional expansion 

Venture capital fund, Euroventures Danube is investing €1m into Budapest-based software component outsourcing company, Fathom Technology ApS, the two parties announced at the end of May, The Budapest Business Journal has reported.
Fathom will use the money to expand its operations in Budapest and around the region, CEO Karl Robb said.
Euroventures' investment represents the largest share of a total of €3m in private equity and debt financing secured by Fathom Technology and will result in Euroventures taking an approximate 18% stake in Fathom, said Thomas Howells, Euroventures partner.
"Fathom provided an opportunity to invest in a high-growth market with a company that has been able to successfully leverage the region's highly skilled workforce, combining it with a distinguished management team," Howells said. He added that the company has assembled an impressive client base and a solid pipeline for the future, and is well positioned to benefit from continued growth in software outsourcing.
"They are following the trends of big companies," Howells said. "What they do is virtually recession-proof. Their software is easy to integrate with other systems."
Howells added that another reason that triggered the investment was the unwavering quality which he said Fathom provides.
"Many from outside perceive Hungary as a source of cheap solutions Fathom are not particularly cheap, but they are as good as or better then anyone else," he said.
Established in 2000, Fathom Technology is a Danish-registered company, though Budapest is home to its development centre that employs almost all of the company's 100-plus employees, Robb said. Fathom develops enterprise software components on the EJB2 and .NET platforms. It has ongoing partnerships with e-business solutions provider, BEA Systems and healthcare application service provider, Click4Care Inc. Fathom also has a sales office in San Francisco.
"We will use the funds to expand development facilities to employ an additional 100 software developers in Budapest and to build up another development centre in Ukraine," Robb said.
He added that Fathom set up a legal entity in Kiev in March and plans to employ up to 100 programmers there.
"We need to increase our exposure to the top programmers. We can't get everybody from Hungary," Robb said adding that he is exploring the possibility of setting up development centres in Russia and Romania.
Euroventures Danube is one of the funds advised by Euroventures Capital Advisory Kft. Investors in the fund include ABN Amro Bank, the European Bank for Reconstruction and Development (EBRD) and the European Union's Phare Program.

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MINERALS & METALS

Tube maker to move production Hungary 

British services and engineering giant, IMI Plc is moving almost the entire production of its copper tube and fittings factory in Ubach-Palenberg, northwest Germany, to its Budapest unit operated by IMI International Building Engineering Kft, executives said recently, the Budapest Business Journal has reported.
The relocation is expected to double the Ft 2.5bn (€10.3m) annual revenues of the Hungarian unit and will create roughly 40 new jobs.
Producing copper and copper-alloy pipeline components for the plumbing, heating and mechanical engineering industries, the German factory has hitherto been operated by R. Woeste Yorkshire GmbH, the German subsidiary of IMI Yorkshire Copper Tube Ltd. The German factory was shut down after 37 years of operation and roughly 80% of its production equipment will be transferred to IMI's Hungarian unit by the end of this year, according to IMI's communications director, Graham Truscott.
"The reason for moving the rest of production is primarily lower labour costs and the very capable workforce in Hungary," he said.
The annual revenue and profits of the Hungarian IMI unit are expected to more than double after the currently ongoing relocation is completed, according to Gergely Urban, chief engineer at the Hungarian company. He said the installation of the new production capacity may be completed by the end of this year.
The relocation is being carried out by British industrial moving company, Beck & Pollitzer Engineering Ltd., which plans to use 35 trucks and several special vehicles to transport the production machinery from the German unit to Hungary, according to Beck & Pollitzer Contract Manager, Abdelgadir Ahmed.
Employing about 18,000 worldwide and posting total turnover of £1.6bn (€2.6bn) last year, IMI deals with many types of engineering production and services. Its international clients include motor producers Volvo, Ford and General Motors, food and beverage companies McDonald's, PepsiCo and CocaCola and oil and energy giants like Shell, British Petroleum and Esso.

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STOCK MARKET

Hungarian buzz fades to a hum 

There's a buzz on the Budapest bourse of late. The newly-elected socialist-liberal government of prime minister Peter Medgyessy, is promising decidedly more market-friendly policies than the departed Fidesz regime led by Viktor Orban, the Financial Times has reported. Promised measures include support for new listings and a new restart to privatisation of state companies.
The stock exchange, now finalising its transformation into a shareholders' company, has been drawing up plans to attract more company listings and boost domestic investor interest.
And, in a drive to attract foreign attention, the BSE is to strut its stuff on the world stage with road shows for investors in London and New York in late June.
The only problem is the buzz seems to have largely bypassed investors. After gaining 10 per cent after the Socialists' election performance, enthusiasm has waned, and the benchmark Bux index is now down on pre-election levels, slipping almost 1 per cent on 6th June to close at 8,078. True, that's 13 per cent up this year, and with a weakening greenback, the rise in dollar terms is more impressive. But compared to hopes in April, it is disappointing.
That's down to politics. Mr Orban's vigorous rearguard action between the two rounds of the elections continues to resonate, seemingly putting the new government on the back foot.
When Mr Orban "warned" that the Socialists would sell off plum state stakes in Mol, the oil and gas company, and Gideon Richter, Hungary's leading drug producer, the Socialists denied any such plans.
More significantly, when Mr Orban promised to freeze the price of gas if he was returned to power, the Socialists followed suit, quenching revived investor interest in Mol.
The government now says it must first create a new gas pricing framework, a process that could take up to 18 months. Mol, meanwhile, continues to sell imported gas at a loss.
"The gas pricing issue is so sensitive I think it is politically impossible to touch tariffs before the November municipal elections. The market is sceptical. You get promises, but in the short term there is not much good news expected," said Robert Rethy, equity analyst with CA-IB Securities in Budapest.
Gyorgy Jaksity, head of Concorde Securities and the man expected to become the BSE's next chairman, shrugs off the stagnation of the Bux, saying the exchange is planning for the medium and long term to attract funds from the growing institutional investment pool in Hungary.
"Seventy per cent of savings are invested in cash, short-term deposits, or under mattresses. There's no positive return on this, and the economy sees no benefit," says Mr Jaksity.
Even if the government has shied away from selling its stakes in Mol and Richter, he believes a clutch of domestic companies, benefiting from the economic growth of the last five years, will soon consider listings.
"There are a number of suitable companies in construction, telecoms, media and IT. I can see five to 20 mid-caps listing (in the mid term). I'm sure the government will help it happen. We want to make listing prestigious," he said.

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TOURISM

Hungarian spa - Hungary's biggest ever investment 

The Mariakalnok-based Mariafurdo termal - es rekreacios park, a Hungarian spa and recreation centre, will become Hungary's biggest investment ever, The Budapest Sun quoted Ferenc Csatai, a partner at the Csatai es Jeles law firm, an advisor to the project, as saying. The spa's price tag equals HUF 32bn (US$118.5m,) New Europe has reported. 
The centre's construction should be finalised by 2005. According to Csatai, the construction is headed by a consortium led by Hungarian group Izland Kft and Dutch company Gibros BV. The consortium also forged a joint venture called Gizland Kft, which is 50:50 per cent controlled by the two groups. "The idea was hatched in 1996 and has now entered its initial stage, with wells being drilled and utilities being developed," Csatai explained. German company Sarcon will head the operation of the centre. "The resort will have an aqua theme park, a spa, holiday cabins and apartment buildings, a hotel and a medical and conference centre," Mariakalnok Mayor, Sandor Szeles, said.

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