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Update No: 058

The Hungarian economy has suffered temporarily because of the current crisis, tourism being right down, but in other respects is doing fine. The prime goal of its managers is to ensure EU membership and then entry into the Euro, as soon as possible.
The rate of inflation is consequently the key problem. It has been pegged to the single figure rate of 9.3% per annum, but must clearly become lower if the country is to enter the Euro. There can be little doubt that this is the number one ambition of its leaders.
Central Bank chief, Zsigmond Zarai says: "Hungary is on the road to low inflation and the introduction of the Euro."
The Hungarian economy has been growing so well of late that it can probably weather the coming EU-wide downturn better than most. The economic research institute, Kopint-Datorg, is sticking to its estimate that GDP grew by 4%in 2001, after 4%
growth in 2000. Industrial output, which grew by 18.3% in 2000, is estimated to have risen by 6.5% in 2001 rather than the earlier projection of 10%.
Capital formation is estimated to have increased by 5.5% rather than an anticipated 8% in 2001, so that it was unable to compensate for slower growth in foreign trade, which is still rising in double figures, however. The outlook for this year is highly uncertain.
Whatever the immediate prospects the longer term perspective could hardly be rosier. Budapest is developing as the hub for foreign investors in its region, drawing on its rich tradition of entrepreneurship and education, technical innovation and openness to outside influences. It is one of the most cosmopolitan cities in Europe and yet still reasonably cheap for the foreign businessman or tourist. Budapest is of course one of the architectural wonders of Europe, with a magnificent location athwart the Danube.
The government of the Fidesz-led coalition under premier Viktor Orban is doing what it can to attract further investment and keep the economy in a modernising mode. 
In November it finalised a HUF 200bn programme of infrastructure investments, partly financed by off-budget funds from the EU. Projects will include new road and rail links and environmental overhaul.
The drawbacks to current policies of modernisation are that they involve a lop-sided development, leaving the east and south rather out of the frame, and an unemployment rate of over 10% of the work force concentrated in those backward regions. The neighbours in these regions, Ukraine and Romania, are less advanced than those to the west and north. 
Finance Minister Mihaly Varga has initiated an idea that would accentuate the two track development problem, but is a good one all the same, to merge the three bourses of Budapest, Prague and Warsaw. This bold conception would clearly align Hungary even more to the successful economies to its north.

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AGRICULTURE

Preferential loans to be available for Hungarian family farms from March

Family farmers, and small and medium-sized agricultural businesses will have access to new preferential agricultural loans from March, Hungarian Radio has reported.
According to the agreement between the Hungarian Development Bank [MFB] and the Ministry of Agriculture, the bank will provide the loans to farmers in three large groups: for the purchase of arable land, the procurement of working capital and as agricultural development loans. The state will assist those who take on loans by means of interest subsidies and guarantees. 
Laszlo Baranyay, the chairman and managing-director of the Development Bank, said that the applications for loans could be submitted to the branches of the Konzumbank, to [Ministry of] Agriculture offices in the counties and village agronomists.

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AUTOMOBILES

Audi subsidiary says engine output up 15%

The Hungarian unit of German car maker, Audi, announced its engine output grew 15% to 1,220,217 units last year, according to Bluebull. A member of the Volkswagen Group and the No 1 exporter in Hungary, Audi said it produced 55,296 cars in 2001, comprising 22,078 TT Coupe, 17,271 TT Roadster and 15,947 A3 models.

Renault, Ikarus forge jv for civilian, military units

A joint venture (jv) will be formed between French car maker, Renault, and Hungarian bus make,r Ikarus, to assemble civilian and military units in Hungary, Ikarus Chairman, Gabor Szeles, said in a statement, reported Bluebull.
According to Szeles, the new venture will also manufacture spare parts and assemble cars. No information as to the breakdown of the shares of the new company was disclosed. Reports say that the plant will produce between 4,000 to 5,000 units each year, which will make it the No. 1 truck maker in central Europe. "Construction of the plant could start in the second half of this year if Renault gives the okay to the project," sources close to the deal were quoted as saying.

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AVIATION

Northwestern Hungary to get airport

An airport in Per, near Gyoer [in northwestern Hungary], may be able to receive aeroplanes carrying 80 passengers from autumn, Hungarian TV2 satellite service has reported. 
The construction of the runway will start in April. More tan half of the cost of the investment will be covered by the EU.

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BANKING

OTP Bank says top aim is to make Slovak IRB a tough rival

OTP Bank succeeded with its first ever foreign-based purchase recently with a 93% stake in the Slovak bank IRB, according to Bluebull. With this acquisition, OTP will try to restructure a communist institution and make it a viable rival in the Slovak banking sector. Although it does not have a large client base, IRB can be found anywhere across Slovakia, OTP Bank said in a statement. "Economic growth was around three per cent so the IRB network provides great potential," OTP deputy head, Laszlo Wolf, was quoted as saying. 
The Hungarian bank is paying just US$14.6m for the Slovak bank, but has agreed to a capital boost of US$20.8m. OTP Chairman and chief executive, Sandor Csanyi said the Hungarian bank is currently interested in three other foreign banks, located mainly in Romania and Yugoslavia. According to Bluebull, analysts are cautiously supportive of OTP's steps. Wolf though was quick to dismiss any claims of a "rash and potentially expensive expansion programme." According to him, OTP Bank's most significant aim is to develop a competitive operation from IRB by 2004.

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CONSTRUCTION

Hungarian government to allocate funds for building homes for rent

Applications for the construction of homes for renting, a programme subsidised by the state, is expected to be taken at the beginning of February, Hungarian Radio has reported. 
Eva Hegedues, deputy state secretary at the Ministry of Economic Affairs, has told journalists that this year's budget has earmarked a state subsidy of 14bn forints for this purpose. By regrouping resources, this sum could be increased...

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FINANCIAL NEWS

Hungary will need cheap labour to sustain economic growth

In order for the Hungarian economy to grow by 5 to 7 per cent in the future, fresh and cheap labour will be necessary, the finance minister, Mihaly Varga, has said at the Budapest Business Club conference, Hungarian Radio has reported.
Mihaly Varga was of the opinion that the Hungarian economy was reaching the level at which growth could be limited by how the labour market develops. For this reason, the government, by means of the preference law [also called status law, on preferential treatment for ethnic Hungarians in neighbouring countries], took the right steps to maintain the country's ability to attract labour. 
According to a status-law-related deal signed by the Hungarian and Romanian prime ministers in December 2001 all Romanian citizens irrespective of ethnic identity would be allowed to take on seasonal work in Hungary. A recent survey, reported by the Hungarian daily 'Nepszava' on 21st January, showed that 72 per cent of respondents feared the labour market impact of the deal.

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FOOD & DRINK

Findus to sell frozen food in Hungary

Swedish frozen food giant Findus AB will launch an affiliate in Hungary shortly, executives at the company told the Budapest Business Journal recently.
One of Europe's largest frozen food manufacturers and distributors, Findus is currently establishing a sales and marketing unit in Hungary and expects it to become a market leader in certain frozen product categories by the end of the year.
"The registration of the Hungarian subsidiary is under way, and the company's products are scheduled to appear in stores in April," said Miklos Ostermayer, managing director of Findus Hungary Kft.
Ostermayer said Findus will enter the local market with a number of frozen products, including a special Far Eastern mix of vegetables under the brand name WOK, breaded fish bites under the name Crispies, and frozen herbs. The company will also sell four types of ready-made frozen vegetable dishes under the name WOK+, besides a range of frozen sea fish fingers, Alaskan cod fillets and fruits of the sea.
According to Ostermayer, the company will launch a marketing campaign with massive advertising in the print and electronic media in May or early June.
Ostermayer said Findus primarily targets customers through hypermarket and supermarket chains.
"First we will try to establish strong ties with international retailers on the Hungarian market, and later on we would like to work with local retailers that have a nation-wide network," he said.
He said the company expects net revenues of Ft 500m (2m Euros) in the first year of its operation, which it hopes to boost to Ft 1.5bn in three years.
Ostermayor said Findus' products are considered premium brands within their categories elsewhere in Europe, and the company aims to be a category leader among premium frozen products in Hungary.
Findus spent 40 years as a frozen food division of the Nestle group, ending in 2000, when the food giant sold it to Swedish firm EQT Scandinavia BV. Since then, Findus has acquired the frozen fish and sea specialities producer Frionor. Findus is currently present in 20 countries and has 12 factory units and 3,650 employees. Its net revenues totalled 700m Euro last year. It has a 70% share of Sweden's frozen food sales.

Fast food chains encounter hurdles in Hungary

Leading fast food chains are encountering bumps and hurdles on the Hungarian market, The Budapest Sun reported. In just one year, French-Belgian burger chain Quick, lost a lot of ground, while Kentucky System Kft was forced to shut down three of its Pizza Hut shops around the capital's outskirts.
McDonald's, the No 1 fast food group in the world, could now become a key player in the fate of the nine former Quick burger restaurants. Quick officials decided last December to withdraw from the Hungarian market, sources close to the deal told the Budapest Sun.
Several Quick shops now go by the name of Wendy's. Mcdonald's Hungary Managing Director, Branislav Knezevic, was quoted as saying that his company "is also involved in negotiations." According to Knezevic, the end result of the Quick restaurants deal has yet to be determined. "In the near future the situation will be clearer," he pointed out.
What the McDonalds official did not clarify was whether his company would buy out any of the former Quick outlets. McDonald's already owns 70 restaurants in Hungary.
Meanwhile, Kentucky System closed its Budaors, Pecs and Szekesfehervar restaurants. Managing Director, Alex Hemingway, said the closures were due to Kentucky System's plan to concentrate on its Budapest operations.
The second biggest burger chain in Hungary, Burger King, stated Wendy's buyout of the Quick outlets would not jeopardise its share of the market. Burger King currently owns 13 restaurants across the country.

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RETAIL INDUSTRY

Dixons debuts with novel store concept

The first Hungarian store of British electronics retailer Dixons plc, will open in Budaors, near Budapest, at the end of February, executives at Electroworld Hungary KFT said recent, the Budapest Business Journal has reported.
The opening of the 6,000 sq.m Electroworld store will mark the world premier of a new store concept that has been developed within the Dixon's group, and will be followed by the opening of two more Electroworld stores in Budapest by the end of the year.
"British elegance mixed with Scandinavian dynamism and practicality," is how Peter Sebestyen, country manager of Electroworld Hungary, described the formula. "The concept of Electroworld cherry-picked the best characteristics of fellow electronics chains such as PC World and Elkjøp. If it proves successful, the same concept may be used for new stores in Central Europe and even back in Britain."
Sebestyen said auxiliary and convenience facilities, which include a help desk, a consumer loan bureau and a free internet café, will be located in the store's retail area. "Other concepts prefer to separate these facilities from the retail space, but we believe this scheme serves consumers' interest the best," he said. Added features of the retail unit will include a photo shop, a section showcasing home movie systems and an on-site computer clinic, he added.
According to Sebestyen, Electroworld's customers will not have to hunt down staff members to find an answer to a question or to get a problem solved. "Customers can take a number from a machine if the desk staff are not there to solve the problem and the number will be paged and displayed throughout the store as soon as somebody from the staff returns," he said. Another unusual feature, according to Sebestyen, is that no advertisements of branded products will be on display in the store. "We are trying to please the customer, not the supplier," he said.
The over 10,000 range of goods on sale will include telecoms and computing equipment, small domestic appliances, a wide range of brown goods including about 300 different types of television sets, a variety of white goods and selections of kitchen equipment, beauty accessories and office equipment.
The starting stock of the store will total around Ft 1bn (€4.1m) in value. The net retail space of the unit is 4,000 sq.m. "This compares to the larges Dixons store in London, which is 4,400 sq.m," he said.
Electroworld products will also be sold in consumer loans schemes provided by Beneficial Rt, a subsidiary of British credit institution HFC, in a bid to make them widely available," he said.
Sebestyen said Electroworld hopes to collect Ft 6bn in net revenues this year, including the revenues of the two new stores, set to kick off in the fall.
"There will be at least two new Electroworld stores in Budapest by the end of the year, the first one or two stores will opening the Czech Republic by the end of the year, and the first unit in Poland will kick off next year," he said. "All of these stores are set to follow the new concept."
Sebestyen declined to name the exact location of the new Hungarian stores, though he said all will be located in Budapest. "We would like to increase the number of stores in Budapest to four or five before we open elsewhere in Hungary."
The opening of the Electroworld store will mean increasing market competition both for locally-owned Muranyi Kft and for German-owned electronics retail chain, Media Markt.

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TELECOMMUNICATIONS

Vivendi's mamouth loan feeds routine operations

French-owned Vivendi Telecom Hungary Rt (VTH) is steadily using up Hungary's largest corporate loan of 2001, with more than two-thirds of the 350m Euro already earmarked for the refinancing of previous loans, CEO, Sandor Polanyi, said recently.
While some observers predicted last July, when the loan was taken, that it would finance acquisitions on the local market, Polanyi said VTH is waiting to see how the newly liberalised telecom market develops before going shopping, the Budapest Business Journal reported.
"Around 260m Euro is going to paying off an earlier loan we took out for network development," said Polanyi. In terms of new investment activity, he said that a significant portion is being dedicated to VTH's internet development, such as providing its own content.
The company is however, sinking capital into network construction in some of Hungary's secondary cities.
On January 11th, VTH announced that it plans to invest up to Ft 800m ( 3.26m Euro) in building an alternative telecom network in the southern Hungarian city of Pécs.
"We expect to spend Ft 269m in the first phase in constructing a 26 kilometre fibre-optic network around the Pécs industrial park, and further spending on an additional 50 kilometres is conditional on its success," he said. He added that the fibre-optic network is being targeted at business customers and will initially serve data, not voice needs. The first 26 kilometres is scheduled for completion by the end of this year, he said.
The project takes the form of a joint venture between VTH and Pécs City Council, under the name Pécs Telecommunications and Infrastructure Kft, a company in which the council has a 25% stake and VTH owns 75%. The municipality of Pécs will contribute Ft 32.5m to the project, said VTH Deputy CEO, Laszlo Arvay. He also mentioned that VTH is close to signing a similar contract with the city council of Szekesfehervar, and also intends to challenge incumbent, Matav Rt, in other major cities around Hungary. He added that VTH already owns the country's second largest fibre-optic cable network.
Polanyi played down the likelihood of major acquisitions in the near future due to uncertainty over how Hungary's telecom market will develop in the wake of the Unified Telecom Act, which entered into force on December 23rd, 2001.
"There are so many issues that haven't been resolved yet, such as fixed-to-mobile termination fees, in which fixed-line operators only get Ft 5 per minute while Ft 37 goes to the mobile operators," he said. He added that this pricing model cost VTH around Ft 7bn in lost revenue last year.
None of the funds from the loan are being dedicated to forays by other Vivendi companies into the Hungarian environmental companies into the Hungarian environmental and waste disposal market, according to Polanyi.
"There is no relationship between VTH and Vivendi's environmental companies, other than that we offer them telecom services," he said. He also said VTH is not planning on securing further credit and that the current loan was taken out without parent company Vivendi Universal's guarantee.

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