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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: 066 - (22/10/02)

Hungary has turned back to the ex-communists. Premier Peter Medgyessy, indeed, was a police informer in communist times, an embarrassing fact that he at first denied to parliament.
The opposition, Fidesz, led by former premier Viktor Orban, are not likely to let him forget it or his denials. Fidesz was only narrowly defeated and is likely to prove a keen and lively opposition, ready to pounce on any failing of the government's.
The ex-communists paradoxically are more Thatcherite, more pro- the EU and foreign investment than the former government of Fidesz. The four-year stint of Fidesz saw steady growth of 5 per cent annually.

Growth slows
The figures of likely GDP growth this year are not encouraging. A growth rate of 3.2% is the current projection. The slowdown in the EU's growth rate is nearly universal, curbing export growth for Hungary and also inwards FDI. The economy is in the doldrums and likely to remain so until a general European recovery is in progress.
The tourist industry is flagging and so is industry and motorway construction. Telecoms is bucking the trend, with mobile phone sales booming. But the general outlook is bleak.

Cutting the budget deficit
As often in hard times, belt-tightening is the order of the day, especially of the public budget. 
The Prime Minister said the government could cut the 2003 budget deficit by about one percentage point. The premier was addressing attendants at the Economic Group conference and told them that the government "will accomplish this."
The reduction is below the 1.5 percentage point cut promised by the Finance Ministry, which estimated the budget deficit to be 4.5 per cent of GDP. The premier indicated a deficit of some 3.3 per cent of GDP in 2003, against 4.2-4.4 per cent of GDP estimated for 2002.
According to Medgyessy, the government could slash the budget deficit in three ways: reducing interest rates following lower inflation to cut debt costs; eliminating unnecessary spending (like the National Image Centre and a large number of other 'gimmicks' put in place by the previous government); and attaining higher revenues from faster economic growth.
Privatisation is to be resumed he said, adding that proceeds from the sales will be paid directly into a fund to subsidise infrastructure projects. "This would avoid allowing privatisation receipts to be used to finance the general government budget," Medgyessy was quoted as saying. "The fund would be used for co-financing projects," he added. The government anticipates major financing sourcing from the EU structural funds and the European Investment Bank on infrastructure development.
The government also plans to redirect funds to investment and savings from consumption. This will include doing away with a 20 per cent tax on dividends from equity investment.
Some HUF 40-50bn will be extended from a new investment package next year, Medgyessy said. Investments should be primarily export-oriented, he added. "In the long term, only an export-oriented path of development is capable of sustaining growth," Medgyessy said. But this depends on GDP growth in the EU, currently languishing on 0.7% on average for 2002.
This year's inflation will be 5.5-6.0 per cent and will drop by one percentage point in 2003, he said. "GDP growth should strengthen to 4 per cent in 2003, from 3.5 per cent this year," he added.

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AUTOMOBILES

Nabi Bus Industries to float shares on US bourse


The controlling shareholder of Hungarian bus maker, Nabi Bus Industries Rt, has announced it will sell some part of its stake by listing Nabi shares on the US Stock Exchange, according to the Budapest Business Journal. 
News of this saw Nabi shares drop significantly to a record low on the Budapest Stock Exchange. Nabi's owner, venture capital fund First Hungary Fund Ltd (EMA), hopes to sell one million of its already existing Nabi shares via the new listing, BBJ quoted EMA co-owner and Chairman, Peter Rona, as saying. Although Rona did not spell out which bourses are considered for future listing, business newspapers said that the Nabi shares would float on a US market and tipped Nasdaq as the potential winner.

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BANKING 

Hungary to privatise three banks

Three more banks, Postabank, Konzumbank and Foeldhitel es Jelzalogbank [Land Loan and Mortgage Bank], are expected to be in private hands by the end of next year, Duna TV Satellite service has reported. A working group, with the participation of APV Rt [State Privatisation and Assets Management Joint Stock Company] and the banks concerned, has been set up within the Finance Ministry to prepare their privatisation. Experts disagree whether or not the privatisation of all three banks is advantageous. 
The TV Reporter said that it is part of the government's assets policy plan to privatise sectors in which state participation is not necessary. According to Finance Minister Csaba Laszlo, commercial banks fall in this category, since they can carry out their tasks even if they are in private hands. 
Laszlo said: "And in the case of banks which carry out state duties, such as the Land Loan and Mortgage Bank, the state can achieve, through regulation and subsides, its goals, such as support for home building."
For the time being, the government has not decided whether the state will keep a certain percentage of its ownership in the three banks. According to Csaba Laszlo, it would not be expedient to keep a minority stake.
Miklos Kamaras, director-general of APV Rt said: "We are planning to invite separate tenders for their privatisation. We expect bids by investors already operating in the [banking] sector. It is entirely an open question what kind of banking investors will apply, whether a foreign bank not yet present in the Hungarian market will see an investment opportunity in one of the banks, or a financially strong group of domestic banks would like to expand by acquiring one of the Hungarian banks on sale..."

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CONSTRUCTION

New tender for District 8 project

Hungary's District 8 Municipality has announced it will invite a public tender for the restructuring of the area after many months of delay, according to Budapest Business Journal. The project is worth US$200m. An official said the decision put an end to an endless debate as to whether it should look for a new deal with the original tender winner, Enix-Pro Kft, which secured the right to develop the area in 2001 but failed to meet its first payment deadline at the start of 2002. "We will publish the tender documents on October 10th, and we hope to choose the winner or winners early next year," Gyorgy Molnar, head of the municipality's economic committee, was quoted as saying. 
The new agreement stipulates that the area of the development programme, the so-called Corvin-Szigony project, will be split into two, more or less equal parts. Interested parties will have the chance to apply for just one part of the project and not the entire project, as was stipulated in the original tender.

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ENERGY

Swiss firm buys NRG's Central European assets


Swiss electricity group, Aare-Tessin AG fur Elektrizitat (Atel), is to take over generating firm Csepel Power Plant Rt in Hungary and two other power firms in the Czech Republic from US electricity giant NRG Energy Inc, the Swiss firm announced recently, Budapest Business Journal has reported.
With a combined value of 780m Swiss francs (€535m), the acquisition will give Atel a foothold on Hungary's power market, which is to be partially liberalised as of January 1st next year.
Atel signed the purchase agreement in London and expects to conclude the transactions by the end of this year, according to Rolf Schmid, Atel's corporate communications director. He added that the takeover of NRG's Czech and Hungarian assets awaits the approval of competition authorities.
"The main reason for the acquisitions is that we are trying to gain a stable market position in Central Europe," Schmid said. "These acquisitions will considerably boost Atel's business opportunities in the region."
The Swiss firm will take over Csepel power's 116 MW Csepel I station, which supplies district heating to Budapest, and the 390 MW Csepel II station, which is fuelled by gas and was inaugurated only two years ago. The two units currently employ about 90.
Atel will also acquire a 44.5% stake in the Czech Republic's ECKG Power Plant and take over NRG's 75% holding in Czech electricity trading company Entrade.
The total combined turnover of the three companies to be acquired by Atel amounted to 650m Swiss francs last year, and the combined cash flow the three firms generated in the same period totalled 150m Swiss francs. The three companies employ over 400 workers altogether.
The sale comes as NRG Energy, a subsidiary of US power giant Excel Energy, cuts back on all its activities outside the United States. Involved in electricity trading primarily on US markets, Excel is believed to have lost a chunk of its sales and profits after one of its major partners, former power trading giant Enron Corporation, went bankrupt earlier this year.
The Hungarian and Czech power plants will be Atel's first generating units in Central Europe, specialising in international power trade, partially through European electricity exchanges in Germany, Switzerland and Italy, with a total annual capacity of 8.5bn kWh. The Atel Group generated 103m Swiss francs in profits on turnover of 1.8bn Swiss francs last year.
The Swiss giant expects that it will benefit from entry onto the Hungarian power market once trading competition eventually develops.

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EU ACCESSION

Hungarian applications for EU pre-accession funds invited

After national accreditation, Hungarian farmers may get access to funds from SAPARD [the EU's Special Accession Programme for Agriculture and Rural development] as early as this year, Imre Nemeth, minister of agriculture and rural development, has announced, Hungarian Radio has reported. Applications can now be submitted for EU funds to support agricultural developments, to develop the processing of agricultural and fishery products and to modernize rural infrastructure.

Hungarian premier pledges help to small firms to stand EU competition

The idea was born under the former government. It came from Sandor Demjan, chairman of the National Association of Businessmen. The first 400 businessmen received their Szechenyi credit cards from the prime minister.
Aniko Nanassy reported for Hungarian Radio on the ceremony: By using the preferential Szechenyi credit card, businessmen can now take out credit up to 500,000 or 1m forints only [one dollar is about 250 forints], but the government is not against raising the sum significantly after the first year, Prime Minister Peter Medgyessy said. He added that it was worth raising the credit limit gradually, year by year. 
The government gives 5 per cent interest subsidy for loans taken out by using the Szechenyi card and also accepts responsibility for half of the credit guarantee fee, while the other half will be paid by the banks. Micro, small and medium-sized businesses can apply for Szechenyi cards. The interest rate will now be under 11 per cent. 
At the ceremonial presentation, the prime minister stressed that the government's aim was to reduce the disadvantage of Hungarian businessmen, compared to their foreign competitors. He said programmes helping EU preparations, support for industrial parks and the development of spa tourism would be continued. Regional differences will also be taken into consideration, therefore regional tax allowances are also being planned, he said. He stressed that Hungarian entrepreneurs would not have to be afraid of the EU because a lot of money could come from there as well. 
Finance Minister Csaba Laszlo repeated that the government would not scrap the Szechenyi Programme [set up by the former government] either...

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FOREIGN INVESTMENT

Government to replace FDI incentives

Foreign investors in Hungary are facing uncertainty as the government prepares to replace long-term tax incentives with a new investment promotion package dubbed 'Smart Hungary' from January next year, Budapest Business Journal has reported.
While major foreign investors already present in Hungary are lobbying to maintain their existing tax breaks, executives said newcomers could delay their investments as the details of Smart Hungary are yet to be drawn up.
On September 6th, the government decided to stop giving new long-term tax incentives to foreign investors involved in manufacturing from January 1st 2003. The decision came after EU Competition Commission, Mario Monti, repeatedly called on Hungary to end tax breaks to foreign investors before it closes EU accession talks at the end of this year in preparation for joining the union n 2004.
While the government opted to curtail new long-term tax breaks, it insists on preserving the previously granted tax incentives still running after Hungary's planned EU accession in 2004, Economy and Transport Minster, Istvan Csillag told business wire Bloomberg. He said ending new tax breaks from next year could serve as the basis of a compromise between Hungary and the EU over the existing tax incentives expiring only in 2011.
Hungary's largest foreign investors, which benefit from existing long-term tax breaks, support the government's current efforts and have launched extensive lobbying with the EU to avoid losing their significant tax incentives, executives said.
"Lobbying is a very important tool in our hands," said Edit Legradi, PR managing with car parts manufacturer, Open Hungary Powertrain Kft. Producing engines, transmission units and cylinder heads since 1990 at its plant in Szentgotthard, near the Austrian border, Open is currently in talks to renew its tax incentives that expired last year, according to Legradi.
The largest exporter in Hungary, German-owned vehicle manufacturer Audi Hungaria Motor Kft, is exempt from paying corporate tax in Hungary until 2008 and is seeking to maintain that exemption, according to Audi Hungaria spokesman, Peter Lore. Since its establishment in 1993, Audi Hungaria has invested about €k1.4bn in Hungary.
Both Audi AG and Volkswagen AG are directly lobbying with EU officials in Brussels to avoid losing the current tax exemption in Hungary, Lore added.
At its September 6th session, the government accepted the new Smart Hungary framework of corporate tax incentives to replace the old system of long-term tax breaks to foreign investors.
The Smart Hungary package includes new tax holidays and direct state subsidies related to developments and new investments carried out by foreign investors.

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RETAIL INDUSTRY

Tesco Global Stores to launch Megapark soon

Tesco Global Stores Rt, a hypermarket operator, announced it is prepared to kick off the second phase of a major development project, the so-called Tesco Megapark, effective 2003, Budapest Business Journal reported. 
The company hopes the Tesco Megapark will incorporate a hypermarket, retail warehouse park, DIY store, retail strip mall and out-of-town shopping mall. Plans include having the Megapark placed around the chain's existing hypermarket, located in District 20, next to the M5 motorway. "Phase one was the existing 15,000 sq m Tesco hypermarket," Iva Kiss, PR manager at Tesco Global Stores, was quoted as saying. "The second phase, set to be completed by early 2004, will comprise a retail warehousing park, the largest of its kind in Hungary, and a DIY store."

UK chain seeks franchise partners

One of Britain's largest clothing and household goods department store chains, BHS Ltd, is searching for franchise partners in Hungary, an executive of the company said recently, reports the Budapest Business Journal.
Matthew Kay, division director, said BHS would like to open its first Hungarian outlet in the autumn of 2003, and the company is expecting inquiries through the trade department of the British Embassy in Budapest from local retailers that would undertake to introduce the British chain's concept to the Hungarian market.
The chain currently operates 46 stores in 12 countries, including Saudi Arabia, Kuwait, Qatar, Uzbekistan and Kazakstan. It is not yet present in continental Europe, other than through franchise partners in Gibraltar, Malta and Greece.
BHS stores offer a selection of private-label clothing items for men, women and children. Besides clothing, BHS also sells bedding, towels, lighting equipment and a selection of kitchen accessories.
"The chain's success is based on supplying premium value, good quality products at competitive prices," Kay said. "This makes BHS a destination store for middle market customers."
Under BHS's franchise concept, the local franchise partner is expected to finance all store-operating costs, Kay said.
In exchange for the annual franchise fee, calculated as a percentage of the value of the stock purchased in a certain year, BHS gives the retailer exclusive rights to operate and trade its branded products within a given territory, according to Kay. The chain undertakes to provide franchisees with a comprehensive and competitive product range and continuous training and support functions. BHS tends to adapt its store formats and merchandise mix to local markets, he added.
Established in 1928, BHS sells a broad variety of household goods and clothing. With over 160 stores throughout Britain, the chain posted net revenues of £900m last year. The company started trading internationally when it opened its first store outside mainland Britain, in Gibraltar.
In the UK, new stores typically have a total selling area of between 2,500 and 4,000 square metres, although stores abroad are considerably smaller, ranging between 500 and 1,500 square metres, reflecting a different retail environment.
BHS is a private firm, owned by the Monaco-based retail tycoon Philip Green, who bought the chain from Storehouse Plc in 2000.

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TELECOMMUNICATIONS

Matav, T-Systems set up 15m Euro research centre

Matav, a subsidiary of Deutsche Telekom and T-Systems, the IT unit of the German group, have collaborated to create a T-Systems Regional Innovation Centre (RIC) in the Hungarian capital, worth 15m Euro, Interfax News Agency reported. Of the overall investment, Matav was responsible for 20% and the remaining was contributed by T-Systems. 
The centre was inaugurated by Hungarian IT and Telecoms Minister, Kalman Kovacs, and Joachim Claus, acting VP of Deutsche Telekom. The main aim of RIC is to develop solutions based on the convergence of IT and telecom technologies, and concentrate mostly on ASP (Application Service Provider). Interfax said T-Systems would rely very much on cooperation with universities training IT specialists.

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TRANSPORT

Hungarian official announces four-year motorway programme

In the framework of a programme called "Sztrada Expressz", which will cover the period from 2002 to 2015, the government is planning to build 830km of motorways and dual carriageways in the next four years, with a budget of 1,800bn [forints - one dollar is about 250 forints], Hungarian Radio has reported quoting Istvan Csillag, minister of economic affairs and transport. 
At a forum in Kecskemet in central Hungary, he also said that the long-term road programme would be based on the former government's ideas, but it would be implemented much faster and in an extended form.

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