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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: 065 - (26/09/02)

Change at the helm
The Hungarians have a new government, with the return of the ex-communists. They are, curiously, unabashed Thatcherites, who in their previous term of office were renowned for slashing public spending and curbing wage growth.
The previous government, led by Premier Viktor Orban, was more right-wing in words, but not in deeds. It was less keen on the EU and on foreign investment. Its 1998-2002 stint in power saw steady growth of 5% or so per annum.

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.
Poor economic performance is likely to make the government unpopular. Fidesz, the previous party in power, did well to contain the defeat in the elections to a narrow margin of 10 seats and should surge back strongly next time round.
Premier Medgyessy has a problem in that he has admitted to having been a police informer in communist times. This revelation came after denial of the facts to parliament. He has shrugged off the slur; but Fidesz are not likely to allow him to forget it.

Looking eastwards
With prospects none too good to the west, the Hungarians are making a drive to the east. For the first time in eight years Hungarian businessmen went to the Moscow Business Exhibition on September 16th-19th. Some 300 exporters attended.
In October comes a Russian-Hungarian economic committee. The Hungarians no longer fear the Russians, NATO members as they are. And they do have a lot of experience of doing business with them!

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ENVIRONMENT

Korte-Organica grows in region


Hungarian environmental services firm, Korte-Organica Rt, will set up subsidiaries in Poland and Austria by the end of this year to help the company's expansion abroad, an executive said recently, Budapest Business Journal has reported.
The company plans to provide traditional wastewater treatment services and also expects to introduce its unique bio-filter systems on foreign markets, according to Korte-Organica Chairman, Istvan Kenyeres.
The Polish operation, to be named Orgnica Polska, will be a joint venture with Polish environmental firm, Bionova and will be headquartered in Wroclaw, southern Poland, Kenyeres said. Korte-Organica will hold 51%.
The company's first development in Poland will be the construction of a Ft 100m (406,000) on-site wastewater treatment unit at a state-owned regional agricultural centre in Backowice. The unit will employ Korte-Organica's special method, named the Living Machine, which uses living organisms, mainly plants, to digest and neutralise contaminants.
"This is going to be our reference project in Poland," Kenyeres said, adding that construction may start in the autumn. He also said Korte-Organica intends to take part in municipal wastewater projects in Poland from next year.
"It takes roughly two years for a new market to start generating real growth," Kenyeres said.
Meanwhile, Korte-Organica will also establish a 100%-owned subsidiary this year to manage the future construction of a wastewater purifying plant at an industrial park in Hartberg, in the east of the country. The as yet unnamed unit, will also provide environmental education.
Korte-Organica is also planning to establish units in Slovakia and Romania next year, according to Kenyeres. He predicts that foreign subsidiaries will account for about 40% of the company's total sales revenues within the next four years.
Last year, Korte-Organica had total sale revenues of Ft 1.2bn and posted net losses. Kenyeres said the company will increase its sales by 50% and is expected to get back into the black this year.
Korte-Organica was formed last year through the merger of two environmental firms, Korte Kft and Orgnica Kft. The merger came about after the two firms received a combined capital investment of about US$3m from Dutch-based environmental venture capital firm, Environmental Investment Partners (EIP) in 1999 and 2000.

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FINANCIAL NEWS

Annual inflation to drop to 5.4% - Ecostat

Hungary's economic research institute, Ecostat, reported that it has dropped its December annual inflation estimate to 5.4% from 5.8% in July, according to the Budapest Business Journal. CPI for the 12-month period stood at 9.2% last December. In its report, Ecostat said economic growth should recover slightly in the last six months of 2002, which would bring GDP growth to 3.4% this year, against 3.8% seen last year. Industrial production should reach 3.5% growth, against 4.1% in 2001. The construction industry should report high growth even though this year's estimate of 9% is below the 2001 estimate of 9.9%.

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FOOD & DRINK

New chains to ply fast food in Hungary

Following the recent local shutdown of two fast-food chains, Wendy's and Quick, several international fast-food operators are looking at the Hungarian market with expansion in mind.
The group of potential newcomers includes only one traditional hamburger chain, the US based Hardee's, while others - such as Germany's fast sea-food chain Nordsee, American sandwich giant Subway, and an as yet disclosed Australian bakery franchise - will target so far largely untouched segments of the market.
"We are in the process of securing locations for our first two units in Budapest, which are expected to open for business during the first half of next year," Les Winograd, communications officer at Doctor's Associates Inc., operator of Subway, the world's largest sandwich franchise chain, said recently, reports the Budapest Business Journal.
Local sources close to the project said that Subway has so far seen and rejected three feasibility studies drawn up by Hungarian companies.
Winograd said negotiations with potential local franchise partners are on hold for the time being, but the chain is looking forward to bids from potential local franchisees.
"In terms of fast-food franchises, the sandwich business still seems to offer perspectives locally. Whereas the traditional hamburger and pizza markets are nearing saturation," said Istcan Kiss, secretary-general of the Hungarian Franchise Association.
Kiss said that currently one foreign franchise chain operates on the local sandwich market, Austria's Duran, while the rest of the market is dominated by Hungarian, not franchise chains, such as McKiwans, and the chicken snack specialists such as Tyukasz ans Csirkefogo.

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FOREIGN ECONOMIC RELATIONS

Romanian president, Hungarian foreign minister discuss bilateral cooperation

Romanian President Ion Iliescu received on 5th September, in Snagov, 30 km north of Bucharest, Hungarian Foreign Minister, Laszlo Kovacs. 
Kovacs stressed during the meeting that his visit marked the significant progress made in the Romanian-Hungarian relations. He announced that Hungarian President Ferenc Madl would make an official visit to Romania shortly. Romanian Prime Minister Adrian Nastase will make an official visit to Budapest (during which an agreement on the strategic partnership between the two countries will be signed) and so will the Speaker of the Romanian Chamber of Deputies Valer Dorneanu. The Hungarian foreign minister believes that such high-level contacts serve the interests of both countries, of the Romanians and the Hungarians alike, irrespective of the country they live in, and contribute to stability in the entire region. 
During the talks, Laszlo Kovacs referred to the participation of Hungarian investors in the privatisation process in Romania and to their intention to continue to make investments in Romania. The Hungarian head of diplomacy required the personal support of President Iliescu for a solution to important issues related to the links between Romania and Hungary. 
President Ion Iliescu appreciated the good cooperation of the two states in international institutions, and stressed the necessity to continue the dialogue in the region and turn to good account Hungary's experience in the process of its admission to NATO. 
Attending were Romanian Foreign Minister, Mircea Geoana, presidential advisers, Ioan Talpes and Simona Miculescu, the delegation accompanying the Hungarian head of diplomacy during his visit to Romania.

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FOREIGN INVESTMENT

Israeli Wardinon buys 40% of Budapest industrial park

The Israel-based group Wardinon, along with foreign investors, has purchased a 40% stake in a Budapest industrial park, according to Israeli press reports. Of the 3.7m Euro investment, Warinon spent 2.15m Euro, New Europe reported recently. The Israeli group's participation in the investment was carried out via a sub-subsidiary, for tax reasons. 
The property is an 8,75 acre compound including 3,400 sq. m of office space, 6,600 sq. m of warehouses and industrial buildings and 7,000 sq. m of parking. The report said three-quarters of the space is leased. When the remainder is leased, rents will likely stand at 500,000 Euro each year, for a yield of 13.5%.

Hungary takes steps to attract flagging foreign capital, to conform to EU rules

The government has declared a programme to enliven investment because too little foreign operational capital has been attracted to country in the recent period. The bigger domestic investors who want to develop will also be eligible for tax allowances and budget subsidies..., Hungarian TV2 satellite service has reported. 
In 2003, the Hungarian tax allowances will adjust to the EU regulations, so the relevant part of the accession negotiations with the EU, the chapter on competition, could also be concluded. One of the most important features of the new system is the development tax allowance. 
Istvan Csillag, economic affairs minister said: "The 2001 decree made the investor eligible for tax allowances after an investment of 5bn forints in the preferred areas, but now we will reduce this to 3bn forints." 
Tax-free investment reserve is another novelty. Firms planning a larger technological development will be able to accumulate their profits free of tax for three or four years. 
The health service contribution will also decrease by a monthly 1,000-1,5000 forints from January. Employing more people in the underdeveloped regions will be eligible for budget subsidy. Businesses building plant sites, even if they do it on rented land, will be allowed to apply for state subsidies. Professional training will also be supported...

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PHARMACEUTICALS

Richter wins privatisation tender for Polish drug firm

The Polish Treasury Ministry officially picked Hungary's largest drug maker, Richter Gedeon Rt, as the winner of the privatisation tender for Polish pharmaceutical company Polfa Grodzisk, Richter announced recently as reported in the Budapest Business Journal.
The Hungarian investor is buying a 51% stake in the company for a sum reportedly close to US$47m, which includes the cost of upgrades and investments. The rest of Polfa will remain in state ownership.
Richter will sign the contract with the Polish authorities in the near future, but will only comment on the details of the buyout afterwards, the company said in a statement. Richter CEO, Erik Bogsch, earlier said the company would only sign the final contract if the price was appropriate and Richter's conditions were met.
Analysts say the buyout is likely to ultimately benefit Richter stocks traded on the Budapest Stock Exchange Rt.
"It's definitely a positive development, even though the stock price is quite volatile these days," said Orsolya Ratkai, an analyst with OTP Broker Rt. "Through the acquisition, Richter will increase its production capacity and gain direct access to the Polish market, which is the largest market in Eastern Europe, so it reinforces its position there. It's no wonder rival local pharmaceutical producer, Egis Rt, is also trying to boost its Polish sales."
She added that Richter is in a good financial position to make the move. "Richter has quite a large cash reserve, and we've been expecting the company to spend it on a good and profitable investment for a long time," Ratkai said.
Others hesitated to evaluate the transaction before Richter reveals the details.
"For now, it seems to be positive news, but no definite details are known about the transaction just yet," said Attila Dzsubak, an analyst with MKB Securities Rt. "We don't know yet whether it is going to be cheap or expensive, how much investment it requires, or to what extent the factory needs to be downsized or restructured, all of which can affect how investors receive the buyout." 
Richter announced last September that it would bid in the privatisation tender for Polfa. The transaction, however, suffered delays due to a government change in Poland.
Once the buyout is completed, Polfa will be Richter's third production unit outside Hungary beside Farmograd in Russia and Armedica in Romania. Richter is not planning any further acquisitions in the next five years, the company said earlier.
In the first half of 2002, Richter's exports to Poland reached US$9.4m, while in 2001 they totalled US$18.3m

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STOCK MARKET

Bourse link-up likely in 2003

The Budapest Stock Exchange Rt (BT) will speed up talks with foreign bourses in the autumn regarding its proposed integration into a large European trading alliance, BT Chairman, Gyorgy Jaksity, said recently, reports the Budapest Business Journal.
"We will probably make an announcement this year identifying who we have started talks with," Jaksity said. "Given that other exchanges similar integration talks were completed in six to ten months, we may have a contract by the middle of next year."
Jaksity said the bourse's board of directors will discuss details of the future negotiation process at its next session. He added that the method of integration would be determined later, based on the range of offers received from exchanges during preliminary talks.
"We have had talks with almost all possible partners in Europe," he said. "We should not wait any longer to make up our minds about integration." 
Although the Budapest bourse's total market capitalisation grew to US$32.4bn by the end of July from US$26.6bn at the end of last year, it is widely thought that only membership in an integrated trading alliance will allow it to grow further in the long term.
The BT has been seeking such membership for the past two years in a bid to increase liquidity and trading volume. Analysts earlier said the best partners would be Euronet NV, Deutsche Borse AG or the London Stock Exchange.
Euronet, created through the merger of stock exchanges in Paris, Brussels and Amsterdam in 2000, has recently absorbed Lisbon's stock exchange, BVLP, and LIFFE, a futures and options bourse in London, and has been providing cross-membership for the Warsaw Stock Exchange since February.
Deutsche Borse is a shareholder in several international exchanges based in Germany, such as the European Futures Exchange (Eurex), European Energy Exchange (EEX), Neuer Market and Newex - the latter trading stocks of Central and East European issuers. Deutsche Borse also provides its trading systems Xetra and Eurex to the Irish Stock Exchange in Dublin, the SWX Swiss Stock Exchange and the Vienna Stock Exchange, among others.
The Budapest bourse is also examining the possibility of joining an alternative trading system, especially in the bond market, according to Jaksity. CEO, Zsolt Horvath, previously said a background study has been prepared to help select the most appropriate alternative trading system to join.
Alternative trading system provider Instinet.com, majority-owned by Reuters Group Plc, has already expanded into Hungary, but only a few domestic brokers use its services.
Recent changes in the BT's organisational structure and management are expected to ease its integration with another securities trading alliance or system. As of June 30th, the exchange was incorporated into a shareholding structure that allows for its merger or cross-ownership with other stock exchanges.
Hungary's previous government introduced an ownership limit of 10% for any single shareholder in the bourse, a rule expected to be revised by the recently elected Socialist-led government.
Jaksity also said that the Budapest bourse and local financial institutions active in securities trading are in talks on a joint marketing campaign, in a bid to encourage Hungarians to put their household savings into securities and other financial products.
He said several institutions have already agreed on the idea and talks are under way about contributions to a joint budget, likely to be handled by a non-profit organisation yet to be founded. While the timing for the kick-off is uncertain, the first quarter of next year would be an ideal time to promote savings, according to Jaksity.

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TOURISM

Upgrades ahead as traditional spas aim at younger, richer clientele

In a modern slant on Hungary's legendary spa tourism, spa management companies are pouring millions of forints into embellishing the country's numerous old-fashioned resorts with eye-catching water fun parks, Budapest Business Journal has reported.
The development projects, which have received major funds from the government's Szechenyi Plan, usually go hand-in-hand with an overall renovation of the existing facilities, and aim to make these conventional healing places attractive for the young, more freely spending generations.
"We launched a Ft 2.1bn (lk8.5m) development project last September and we hope that the increased quality and variety of our services will attract more and more high-income tourists from Austria and Germany, as well as from Hungry," said Istvan Nemeth, chairman and general manager of Bk Spa Rt.
The 40-year-old Bk Spa, in the west of the country not far from the Austrian border, is Hungary's third largest after Hajduszoboszlo (in eastern Hungary) and Heviz (close to the western edge of Lake Balton). It currently operates with 19 pools on a 14-hectare site.
In 2001, the first year when spas could apply for subsidies under the Szechenyi Plan, Bk received the highest sum, Ft 1bn. Next in line for funding among traditional spas were the facilities in Debrecen, Gyor and Sarvar (the latter close to Bk) with over Ft 900m in subsidies each.
"I do not expect a sudden jump in the number of visitors after the renovations, but the new facilities, especially the fun park, will help us stay in the increasing competition for guests," Nemeth said.
The usual attractions of water fun parks, a concept Hungary has adopted from Western Europe include various slides, white sandy beaches, marooned pirate ships, mermaid statues, interactive water game and whirlpools. Last year the Bk Spa received 854,000 guests, most of them from Germany, and Nemeth hopes that by 2010, the number will be over one million.

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