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Update No: 061 - (23/05/02)

Political reversal
The Hungarians had an election in April, won just by the socialists (HSP), successors to the communists, over Premier Viktor Orban's Fidesz-Hungarian Civic Party. The HSP obtained 178 seats on a 73% turn-out.
It is an irony that the socialists are more inclined to free market solutions and foreign investment than Fidesz, which is regarded as on the right. But then Fidesz is very nationalistic, whereas ASP is internationalist. Both are very much in favour of the EU, which Hungary is aiming to join in 2004.
The exact nature of the government is not likely to be evident for a while, as negotiations are going on to form a coalition. The Democratic Forum (MDF), Fidesz's former coalition partner, may set up on its own, making the socialists, who have only 10 more seats than Fidesz, the biggest group in parliament.
The chairman of the Socialist Party, Laszlo Kovacs, the Free Democratic Party leader, Gabor Kuncze and Peter Medgyessy, the prime-ministerial candidate, wrote a joint letter to President Ferenc Madl a few weeks ago, confirming that they have no plans to launch talks with Fidesz on a grand coalition. The policies in principle are not so far apart, but in practice the socialists are less encumbered by vested interest groups, the agrarians and others, in pursuing an uninhibited pro-market and pro-EU line.

Tiger economy
Hungary has been transformed in the last twelve years. Its private sector, which accounted for a fifth of GDP in 1990, now produces more than 80%, one of the highest proportion in Europe. It is not just that assets are in private hands. Many are in foreign hands, after US$25bn of foreign direct investment (FDI) since 1990. Foreign inflows are expected to remain stable at US$2bn per annum.
Under this regime exports have soared from US$5 to US$30bn over the same twelve-year period, while the EU share of them has risen from 26% to 76%. This is the sort of foreign investment and export-led growth that made Ireland the Celtic tiger from 1970.

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BANKING

Bank of China readies Hungarian subsidiary

The Bank of China will open a subsidiary in Hungary by the end of 2002, according to Shu Xiao Dong, chief of the bank's representative office in Hungary, BBJ reported. "We are now preparing for it," Shu was quoted as saying in reply to queries about the creation of the subsidiary. According to Shu, the Chinese state-controlled bank hopes to apply for a banking licence from the Hungarian State Financial Institutions Supervision (PszAF) by the end of April or early-May.
"The steady development of the Hungarian economy and the increasing volume of bilateral trade and investment are the grounds for upgrading the bank's current status in Hungary from a representative office to a subsidiary, which will participate in commercial operations," Shu noted. 
The Bank of China's representative office in Hungary, located in Budapest was founded in 1997. The Chinese bank is active in the foreign trade financing sector. It has almost 13,000 offices in China and another 559 across Asia, Australia, Europe, Africa, North America and South America. Key aspects for the Hungarian subsidiary will be to concentrate on corporate banking, such as trade financing and retail banking. "The Bank of China will naturally focus on Chinese corporate and retail clients, but will not exclude other nationalities from its clientele," Shu said.

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ENERGY

MOL's gas unit to fall into state hands

The gas division of MOL, Hungary's oil and gas monopoly, may be purchased by the Hungarian government before the current government's term in office comes to an end, MOL's President and CEO Zsolt Hernadi said, confirming comments made by Prime Minister, Viktor Orban. 
According to Budapest Business Journal, buying the gas division would grant the state more control over domestic energy prices and curb company losses. MOL's growth has been restricted because of the government's decision to cap energy price increases in order to curb inflation. According to Hernadi, the company's assembly must endorse the sale of controlling shares in the gas unit. "For the time being, all that is certain is that we want to obtain a surplus value when selling the gas division, and we shall only sign a transaction that makes this possible,," Hernadi said.

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FINANCIAL NEWS

Volksbank lends to small businesses

Volksbank Hungary Rt has expended more than Ft 450m (€1.86m) so far this year from a European Bank for Reconstruction and Development (EBRD) credit line of Ft1.5bn. The managers of Volksbank Hungary and the EBRD signed the credit agreement in 2001, the Budapest Business Journal has reported.
According to the agreement, the EBRD opened a refinancing credit line to the equivalent of €10m, with which Volksbank Hungary can finance low interest loans to SMEs.
In addition to this, the EBRD granted the bank a subsidy of €1bn for establishing a background infrastructure. The bank signed an agreement with credit guarantor Hitelgarancia Rt for guaranteeing 80% of the loans issued to small and medium-sized enterprises.
Volksbank Hungary said that so far it has issued loans to 40 such companies using the credit line. The bank plans to draw on an additional monthly Ft 100m-150m from the credit line.
An interesting feature of the EBRD-Volksbank Hungary joint refinancing loan is that a special scoring system will be established for the credit check, which will reward the success of the business rather than security for the loan.
Volksbank Hungary had total assets of more than Ft 100bn at the end of 2001, up 44% from 2000. Compared to a year earlier, the bank's loans grew by 28%, its deposits were up 44% and the number of its branches increased from 14 to 19.

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INFORMATION TECHNOLOGY

IBM, Hitachi in talks over local factory

IBM Storage Systems is negotiating to sell hard drive manufacturing assets, including the hard disk factory of IB Storage Products Kft in Szekesfehervr, to Japan's Hitachi Ltd., IBM's official spokesman said recently, the Budapest Business Journal has reported.
Dieter Munk, IMB Storage System's general manager for Hungary, declined to comment on the plants. Peter Mohacsi, press spokesman of the Hungarian plant, which is the country's fourth largest company by revenues, confirmed that negotiations are underway with Hitachi. He said he was unable to confirm or deny that majority ownership of the plant would be transferred to Hitachi. He also said that the transaction would take the form of an "alliance."
According to a press release issued by IBM in mid-April, the two multinationals are planning a joint venture to carry out the research and development, manufacturing and marketing of HDD systems. The press release also mentions that Hitachi is expected to hold 70% of the new company, which will be registered in San Jose, California, and will pay IBM cash for its HDD assets.
"Strong hardware is essential to our company-wide efforts to enhance solutions operations," Yoshiro Kuwata, executive vice president and director of Hitachi Ltd., said.
"The joint venture will combine selected Hitachi and IBM disk drive assets, including employees, facilities and intellectual property," red the IMB press release. "Both Hitachi and IBM expect to source a major portion of their HDD supply from the joint venture. The new company's management team is expected to include executives from both companies."
However, Mohacsi emphasised that the current agreement is only a statement of intent, and negotiations are still being held to determine the exact terms of the alliance. He categorically denied reports from a source inside IBM's Hungarian manufacturing operations that the move was due to losses at the Szekesfehervar factory, caused by lacklustre demand for the HDD products made there.
IMB Storage Products has two plants in Hungary. The Szekesfehervar plant manufactures hard disk drives for portable and desktop computers, while another factory operated by a supplier in Vac, about 30 Kilometres north of Budapest, produces IBM's "Shark" range of enterprise storage serves.
A source within IBM, who declined to be named, said the Vac factory will not be affected by the deal with Hitachi, although Mohacsi was unable to provide any information on this.

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TOURISM

Two new hotels planned near downtown hub

Two new hotels are currently in the pipeline in the neighbourhood of Blaha Lujza Ter in District 8, the Budapest Business Journal has reported.
One of them is a building on Csokonai utca, which developer ZSS Kft is planning to turn into a three-star hotel with 65 rooms. The hotel will be operated by Prague-based Horizon Hotels Ltd., the master franchiser for Days Inn hotels in Central and Eastern Europe.
Both ZS and Horizon Hotels are hoping to create a three-star hotel chain in Central Europe, tentatively dubbed "Star," if the Budapest Hotel proves successful.
The other separate project involves the Corvin department store, located on Blaha Lujza ter itself. An unidentified US-based hotel operator chain is planning to buy the building and convert it into a four-star hotel, a source close to the project, told the BBJ recently. The source said the chain is not yet present on the local market.
The building on Czokonai utca is currently owned by telecom Matav Rt. A sales contract is being finalised between Matav and ZS, according to ZS's managing director, who declined to be identified. 
The total investment by ZS, including the purchase price of the building, will amount to US$3-4m, the managing director said. ZS is owned by a Cyprus-based company and its managing director is involved in several other property developments in Hungary.
The hotel will have an atrium, and nine of its rooms on the top floor will be able to function as serviced apartments for long-term residents. The ground floor of the building will offer the possibility of office use, the managing director said.
ZS is expected to sign a management contract with Horizon Hotels in a few weeks' time, said John Wagner, president of Horizon. The three-star hotel will provide "good value, good service and good breakfast," said Wagner, adding that such a hotel in this category is difficult to find in Budapest.
Wagner said that the hotel on Csokonai utca would offer the same or better service as other three-star hotels in the town, at a lightly better price. He added that he would like to achieve an annual occupancy rate of 65% in the first year of operation.
As for the possibility of a chain of similar three-star hotels in Hungry and the region, Wagner said "Star" is only a working name, since he would first like to make sure that there is no other "Star" chain in the world.
Meanwhile, ZS is already negotiating with relevant parties to purchase another building along Rakoczi ut, in the same neighbourhood, as well as another property between Andrassy ut and Nyugati railway station, and an additional property in Buda, according to the company's managing director. He declined to identify those buildings.

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TRANSPORT

Hungarian transport minister outlines public road building project

The transport minister outlined a public road development project in Balassagyarmat in northeastern Hungary on the Slovak border, Arpad Zengoe of Hungarian Radio reports. Preparation of a public road building development programme, similar to the 15-year motorway building project, to start soon, paying special attention to roads belonging to local governments, Transport Minister Janos Fonagy announced after his inspection of the roads in Balassagyarmat. 
There are 130,000 km of public roads in Hungary, 100,000 km of these are under the authority of local governments. The minister said that modernization was rather urgent, since these roads were built on foundations that are 60, 80 even 100 years old and they did not meet today's requirements. Therefore, the local governments cannot be abandoned and although they will have to submit tenders, the rate of state support will depend on the state of the roads and not to what extent they are owned by the local governments, Janos Fonagy said. 
He also announced that in September the construction of a ringroad bypassing Balassagyarmat and a container lorry park for 40 lorries at the border crossing can be started. The 2.3 km bypass costing 800m [currency not specified] will be covered mostly from PHARE funds, the budget only contributing 197m forints to this. However, for the remaining 4.5km-long road connecting the bypass the budget allocated 1.7bn [presumably forints]...

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