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Update No: 060 - (18/04/02)

Foreign investment interest
The Canadians are objecting to the Hungarian government's nationalisation of a Canadian-led business running Budapest's airport terminals.
The Canadian ambassador, in a letter presented to Hungary's foreign minister, on February 21st and seen by the Financial Times, said that Canada believes that the nationalisation last December of FUF, the airport-operating company" appears to violate the obligations of the Canadian- Hungarian investment protection agreement. It also says that the issue could "seriously damage" foreign investment in Hungary. 
Hungary's economic performance is certainly influenced by its government, but in a fundamental sense of more importance are the foreign investors, whose total stake now tops US$20bn. Hungary is following a path earlier set by Ireland. Let in the multinationals and modernise. It is something both leading parties know full well. That is why there is such a large measure of bipartisan agreement in Hungary.

Elections Unfolds
The Hungarians are facing parliamentary elections in April. There will be a first round on April 7th and a second on April 21st. The contest is between the present right-wing governing coalition, dominated by Fidesz, the Civic Party of Premier Victor Orban, and the opposition Hungarian Socialist Party, who governed in 1994-98.
The race is a close one. The population are naturally disenchanted with several aspects of the government's performance, but by no means with such short memories as to think it certain that the socialists would do a better job. In fact it is clear that in broad policy terms the two are in main agreement.

EU entry
The key question is EU accession and the terms on which Hungary should enter. But privatisation and fiscal policy are also vital. "Being a small country, Hungary has to look to Brussels for directions," says Zoltan Raba, an analyst at CA 1B Securities Rt. Or, as Peter Bihari, managing director of 7 Sigma Kft, a market analysis company which lists Budapest Bank Rt among its clients, "due to objective economic constraints, there is little room for a major change in economic policy. However, this present loose fiscal policy cannot be continued if Hungary wishes to meet the Masstricht requirements." These refer to the fiscal conditions needing to be met to enter Euroland. Inflation at 9.3% annually is still far too high for that.
A socialist government would ironically be more likely to introduce a stricter fiscal policy, while Fidesz would carry on going for growth, which has been in the 5% range for some years now. But both parties would be expected to lower taxes, something Fidesz promised but failed to do.
One area where the two parties genuinely do differ is agriculture. Fidesz favours the small farmers and the socialists the cooperatives. The real problem is that neither are efficient enough to compete in the EU. The former are too small and the latter insufficiently market-oriented. It is possible to defend them on ecological grounds and that is naturally what they both do themselves. Little change is likely here, with a covert protectionism continuing after EU entry.

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AVIATION

Malev, Bombardier sign aircraft purchase deal

Malev Hungarian Airlines Rt has announced that it has inked a deal with the Canadian aircraft maker, Bombardier Inc., for the purchase of two 50-seater aircraft. No financial terms were disclosed, according to BBJ. This is the first acquisition of aircraft for the flagship carrier, which has failed to generate profits.
To date it had only leased fleets. The two CRF-200ER aircraft, due to arrive at Hungary's Ferihegy airport in early summer will be managed by Malev Express Kft, a regional carrier that is fully controlled by Malev.

Canada makes official move over Ferihegy airport spat

The management of Budapest's Ferihegy airport has officially been called into question by the Canadian government, according to The Budapest Sun. Problems began late last year when Airport Development Corp (ADC) which is controlled by a Canadian investor, protested about the Hungarian government's management of the airport as the former was initially awarded he US$140m deal to construct the Ferihegy 2B terminal in 1996, into which it invested US$17m.
Back then, ADC had inked an agreement with the Hungarian government to obtain 34 per cent of Ferhegyi Utasterminal Kft (FUF) and operate the airport for a 12 year period, while the state would keep the remaining stake. Management fees would recover ADC's initial investment. But Hungary's Ministry of Transport and Water Management ordered the annulment of the contract with FUF and appointed a 100 per cent state controlled group in its place, the Sun wrote.
In response, the Canadian Ambassador to Budapest Mara Moszczenska sent a letter to Hungary's Foreign ministry and the Sun obtain a copy, which outlined that Ottawa was concerned that the cancellation of the agreement breached the terms of the 1992 Canada-Hungary Foreign Investment Protection and Promotion Agreement (FIPA). In the letter, cited by the Sun, the ambassador said that the agreement seemed to have been "expropriated in a manner inconsistent with international norms and without compensation."
ADC was refused compensation by the government for the untimely cancellation of the agreement, ADC Director Michael Huang was quoted as saying. "The lack of cooperation by the government over the issue is an attempt to keep it in the background because of the forthcoming elections," he admitted. In the letter, the ambassador urged "amicable, good-faith negotiations with the investors and their representatives." It also proposed the selection of an interlocutor to negotiate a mutually acceptable settlement, the Sun wrote. The Finance Ministry has acknowledged receipt of the letter and said it was coordinating key government organisation responsible for launching talks with ADC. "It is in the interest of both sides to settle as soon as possible, but preparations take time," an official was quoted as telling the Britain-based Financial Times.

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BANKING

K& H opens private banking subsidiary

Kereskedelmi es Hitelbank Rt (K & H), an Hungarian commercial bank, has established and opened a private banking subsidiary, the bank said in a statement. K & H hopes to secure the No.1 spot on the banking market, Budapest Business Journal quoted Edit Varkonyi, the new unit's deputy CEO, as saying. The new service was set up in regional centres: Budapest, Gyor, Nyiregyhaza, Pecs and Szeged. K & H said, citing a poll conducted in 1997, that about 17,000 households have liquid or spending capital higher than HUF 50m (US$178,600). With an annual price-tag of HUF100,000 (US$357) the service is geared to rich customers.
The service comprises management of investments in capital markets, real estate and art. "Many banks are competing for the wealthy clientele but K&H has paid extra special attention on this group," Varkonyi was quoted as saying. The initial investment for the subsidiary totalled HUF150m (US$535,700) and it is likely to pay for itself by the end of 2002.

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FOOD & DRINK

Fund snatches sweets maker from jaws of Kraft

Austrian financial investor, Raiffeisen CEE Private Equity Fund L.P., acquired more than 99% of leading domestic confectionery producer Stollwerck Budapest AG for an undisclosed purchase price, fund manager Raiffeisen Private Equity Management (RPEM) announced recently, Budapest Business Journal has reported.
The private equity fund snatched the sweets company away from US branded food and beverage giant, Kraft Foods Inc., by purchasing a right of pre-emption with the help of a minority shareholder in the confectionery firm.
"We are deeply impressed with and attracted to the brands of the company and the market share these products have in Hungary and abroad," RPEM CEO, Witold Szymanski said. He said the confectionery sector in Hungary has great growth potential and will grow faster than the country's GDP in the future.
Established in 1992, Stollwerck Budapest has registered capital of over Ft 6bn (€24.6m) and had sales revenues of more than Ft13bn last year. The company is the leader in the local dessert confectionery market with a 30% share and also controls 40% in the segment of alcohol-filled confectionery, also export liqueur-filled chocolate brand Cherry Queen to over 40 countries. The company is the third largest producer of tablet chocolate in Hungary with a 25% market share, and also has a 10% stake in the area of count-line chocolate products. Stollwerck Budapest is the producer of several popular confectionery brands in Hungary, such as Tibi chocolate bards and Bunakavics bonbons. 
The Austrian fund grabbed the sweets company from strategic investor, Kraft Foods, which was close to completing the acquisition of Stokkwerck units in Hungary. Kraft Foods agreed with Stollwerck AG on the sale of the latter's sweets production in Russia, Poland and Hungary more than eight months ago. While the transactions were completed in Poland and Russia, the buyout in Hungary was delayed pending the approval of the Competition Office.
"We didn't talk to Kraft. We approached one of the minority shareholders," said Viktoria Zombory, head of RPEM's office in Budapest. She said the fund manager agreed with one of the two minority shareholders of the chocolate firm to establish a joint venture and become a minority shareholder of Stollweck Budapest with a stake of less than 1%. Named Triasz-Perry Kft, the joint venture is majority owned by foreign registered Mablesoft Holding, which is an acquisition vehicle of RPEM.

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INDUSTRY

Beauty products traders form purchasing alliance

In a bid to bargain for lower prices and decrease logistics costs, 11 Hungarian-owned cosmetics and beauty product wholesalers, led by market leader Stella Rt, recently founded purchasing alliance StellaKer Kft, the Budapest Business Journal has reported.
"StellaKer aims to accelerate the expansion of its members in the local market, get favourable conditions from suppliers and decrease transportation and logistics costs," said Gabriella Simó, who is CEO of Stella and one of the managing directors of StellaKer. "All these companies have a clear profile and goods range and they mostly serve local professions, such as beauty salons or hairdressers."
She said the operations of the purchasing alliance will reach full speed next year, when it will launch four regional logistics centres in Szeged, Gyór, Nyiregyháza and Budapest.

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INFORMATION TECHNOLOGY

Budapest, Seoul forge IT cooperation pack

Hungary and South Korea are prepared to strengthen their relations in the information and technology spheres, according to the Korean Times.
The two sides reached an agreement recently at a meeting with Zoltan Sik, head of Office for the Hungarian Government Commission in charge of IT, who was in South Korea, and Korean Vice Information and Communication Minister, Kim Taehyun. The parties discussed several matters including a Hungarian proposal for an exchange of human resources between the two nations, the Times wrote. Korean government officials were quoted as saying that both sides said they would hold talks on electronic commerce and the creation of an online network between the two countries.
Budapest also urged Korean investors to participate in the country's information restructuring efforts, namely for mobile telecommunications, system integration and high-speed Internet.
To ensure the cooperation process works out, the two governments said they would introduce a joint research and develop project in the IT sectors between Hungary's Technical University of Budapest and Korea's Electronics and Telecommunications Research Institute, the Times said.

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MINERALS & METALS

Ikarus, Dunaferr sign Ft 1.5bn supply agreement

Former bus manufacturer, Ikarus Rt and state-owned steel giant, Dunaferr Rt, were set to sign a Ft 1.5bn (€6.1m) cooperation agreement recently, under which the Dunaújváros-based steelworks will fulfil the steel product requirements of nine Ikarus subsidiaries, Budapest Business Journal has reported. 
Companies that will use the Dunaferr products mainly manufacture vehicle components for companies including Mercedes, Opel, Suzuki and Hungarian bus-maker Nabi Rt. Ikarus has also carried out final bus assembly for Renault, Iveco, Volvo and Neoplan and supplied tools for Franci, Volkswagen and Alcoa.
Under the agreement, which was to be signed by Ikarus President, Gábor Széles, and Dunaferr CEO, László Tóth, Ikarus' steel product procurement will be carried out through steel trading company, Dutrade Rt, which is 80% owned by Dunaferr.
Dustrade will construct a warehouse and logistics centre at Ikarus' Székesfehérvár site in order to carry out the work.
"This cooperation is an example of how - even in the globalising world - a large privately owned Hungarian company can join forces with a large Hungarian state company to meet the challenges of the market," said a press release issued by the two companies.
In answer to the question of whether the use of an exclusive supplier would reduce competition in Ikarus's procurement market, one Ikarus executive, who declined to be named, said; "I believe that this agreement came about because the prices were very attractive, due to economies of scale."
No sources were available to comment officially on whether the warehouse will be a joint investment or a unilateral one, or how much the development will cost.
Dutrade has 19 sites around the country dedicated to the trade of steel products, under the name Dutrade Centre, as well as a carbon steel outlet known as the Dutrade Steel Service Centre, which was completed in May 2000 in a Ft 20bn Greenfield investment. The latter centre processes around 130,000 tons of steel product every year, and has annual sales revenues of around Ft20bn, according to the press release.
In the initial stage of the cooperation, Ikarus will be taking advantage of the existing products and services already offered by Dunaferr, including the Steel Service Centre. In a later phase, the agreement will be extended to imported products that Ikarus is unable to procure from Hungarian sources. According to the press release, the nine subsidiaries of Ikarus, which acts as a holding company, procure steel products to an annual value of Ft 1.5bn.
Ikarus was formerly the state bus manufacturer, selling its vehicles on Soviet markets until the collapse of communism in 1989.
After a series of financial crises following the loss of guaranteed markets and later the Russian economic crash at the end of the last decade, Ikarus offloaded its bus-making activities in a deal with Renault-Eveco consortium, IrisBusHolding S.L., which took a 75% stake in a new joint venture called IkarusBus Rt. Ikarus retained a 25% stake in the company.
Since then, Ikarus has been reorganised into a holding structure with subsidiaries carrying out a variety of activities, mainly centred around the vehicle industry.

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RETAIL INDUSTRY

Strong retailing in Hungary draws western firms

Major Western retailers are cashing in on the "shop till you drop" mentality that is sweeping Hungary, the Wall Street Journal Europe has reported. 
With wages rising faster than inflation, Hungarians are falling over themselves to spend, spend, spend. The enthusiasm was evident in the opening of Dixons Group PLC's first Hungarian store. The company, one of the biggest names in UK retailing caused a near riot with rock-bottom offers to celebrate the opening. A mob of 15,000 besieged the store on February 28th, forcing police to call in reinforcements, while the staff handed out tickets to get in.
"Like other retailers, we recognised the opportunities in Central Europe after carefully studying a number of countries in the region. Hungary is the most advanced economically and is a candidate for entry to the European Union," said Lesley Smith, Dixon's corporate affairs director.
Budapest's attractiveness lies in its large population of young professionals and Hungary's growing economy, stable banking system and high level of foreign investment.
Purchasing power in Hungary and the Czech Republic, currently the fastest growing countries in Central and Eastern Europe after Poland's growth slowed considerably in the last year, is over twice as high as the region's average, according to a recent study by market researcher, GfK. That is a bit more than half of the EU's average spending power, the report said.
Another UK stalwart, Tesco plc, already has an established Hungarian presence, having been one of the first food retail chains to enter the country along with Metro AG of Germany. Auchan and Cora of France, along with Interspar of Germany soon followed. 
Even chains doing poorly elsewhere, such as Marks & Spencer of the UK are thriving in Hungary. One reason for that is Marks & Spencer doesn't directly own the Hungarian business. Instead it is operated as a franchise by Hungarian retail outfit S-Modell. "We at S-Modell live in this country, have been around for quite a while and know our customers well," said S-Modell Chief Executive Katalin Juttner. "We only select from the Marks & Spencer product range what sells here, such as sporty and casual women's and mens wear and lingerie."

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