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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: 064 - (27/08/02)

Hungary has a new government, the conservative Fidesz party just losing out to the social democrats (ex-communists), in elections in June. Fidesz put up a good performance and ex-premier Victor Orban can expect to head another government one day, being still in his early forties.
His government's record was by no means bad. But as in an all transition economies poorer people are reallyhurting , whether by unemployment, low wages or the sheer grind of menial labour. The success of the ex-communists is not so surprising.

New government favours the EU and FDI
An irony of transition in Hungary is that the ex-communists are Thatcherite in policy, as their previous tenure of office in the mid-1990s showed, while the centre-right Fidesz are wary of the EU and foreign direct investment (FDI). They are not opposed to them, exactly, but are concerned about certain ill-effects.
For instance, the EU and FDI are taking over anyway in a big way. Once Hungary is under the orders of Brussels, it will be even more the case. 
The new government does not share these fears, at least not to the same degree. It is preparing for an early EU entry in 2003, completing closure of the 29 chapters of the Acquis Communitaire. Hungary does not have the same problems as Poland, with its huge antiquated rust-and-steel belt, uneconomic mines and a plethora of small peasant farms.
The small-holding farm sector in Hungary is, nevertheless, threatened by EU entry, since it will have to compete with the subsidised farmers long benefiting from the EU's CAP. Hungary is well placed in other respects to become a regional centre for EU business activity. Budapest is one of the lodestars for FDI already, which tops US$20bn in Hungary.

100-day programme for late 2002
The new government is preparing a 100-day programme to boost family support and the economy generally in the last half of 2002. The communist provenance of the social democrats is perhaps shown by the assiduity with which they are predicting figures for growth and inflation.
This year's growth of GDP is coming in at 4.5%, subject to revision by year-end. GDP growth is projected at 4-5% for 2003 and 4.5-5% of 2004. Consumer price inflation is forecast to be around 5% in 2003 and 4% in 2004. With the wider EU economy in such an uncertain state, these are brave predictions, even hedged around with qualification. This looks especially true in the aftermath of the most serious flooding in Central Europe, including Hungary, for more than a century. It is not yet evident what the extent of the damage is, but growth at least until the end of the year is likely to be lower than it otherwise would have been.
Nevertheless, it is clear that Hungary is really doing rather well in the medium term and can expect to be lifted into an EU-style prosperity in the next generation. Once the financial and commercial hub of the Austro-Hungarian Empire, Budapest is well-situated to gain a new regional influence and appeal.

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AGRICULTURE

Wheat harvest poor in Hungary, EU to allow some duty free exports


According to estimates of the Agriculture Ministry, 3.9m tons of wheat and 6m tons of maize will be harvested this year, which is less than even the most pessimistic estimates. However, the quality of the bread wheat is much better than usual, Hungarian Radio has reported.
According to sources in Brussels, an agreement will be officially ratified soon in the European Union, on the basis of which Hungarian farmers will be able to export 450,000 tons of maize and 600,000 tons of wheat to EU member states without having to pay customs duty. The agreement is expected to be backdated to 1st July.

Hungarian government preparing farmer debt consolidation programme

The government is trying to help agricultural producers with a debt consolidation programme, Imre Nemeth, minister of agriculture and rural development, has said, Hungarian Radio has reported. 
Speaking in Adacs, in Heves county [northern Hungary], he said a debt cancellation programme was under preparation. It will take the needs of producers who suffered natural disasters in the past two years into consideration. Another debt consolidation programme for regions with disadvantageous conditions is also under preparation.

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AUTOMOBILES

Audi invests in new engine production

Audi Hungaria Motor Kft will begin manufacturing its next generation Fuel Stratified Injection (FSI) engine from July following a €5m technology upgrade at its production site, the company said recently, Budapest Business Journal has reported.
As a result of the investment, Audi Hungaria will have the capacity to produce 500 FSI engines daily. Initially the company will make 110 kW, four-cylinder, four-valve, 2000 cc engines.
Prior to the launch of serial production of the new engine, Audi Hungaria updated its cylinder head production line along with its four-cylinder engine assembly line.
"The production of FSI engines proves the competitiveness of the Gyor-based company within the Volkswagen group," said Jurgen Lunemann, managing director of Audi Hungaria.
FSI is a brand new technology in Otto engines. It provides better performance and torque while consuming less fuel. FSI engines also meet Euro4 emission standards.
Set up in 1993 as a wholly-owned subsidiary of Audi AG, Audi Hungaria last year produced 1.2 million engines and assembled 55,000 cars, recording sales of €3.4bn. Between the local firm's founding and the end of 2001, it invested €1.26bn in Hungary. It currently employs 4,700. 

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CHEMICAL INDUSTRY

Irish Milford Holdings ups stake in BorsodChem

The Ireland-based group, Milford Holdings Ltd., upped its share in BorsodChem Rt by 3.17 per cent to 27.97 per cent, the Hungarian chemicals group said in a state, cited by Econews.
Because the Irish company did not clinch one third of BorsodChem, it will not have to make a buy out offer for the remaining outstanding shares, according to Econews. Milford Holdings repurchased its 24.8 per cent stake in the Hungarian group from Sibur, a subsidiary of the Russian gas giant, Gazprom. Milford Holdings purchased the stake nearly two years ago and then sold it to Sibur in June 2001, using CIB Bank as an intermediary.

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EU ACCESSION

Hungarian official forecasts funds to be received from EU

Hungary will receive 1,030m euros in EU regional (structural and cohesion) funding in 2004, 1,180m euros in 2005, and 1,465m euros in 2006, according to estimated figures, 'Nepszabadsag' has reported. Hungary will be required to supplement these Brussels funds with 20-60 per cent funding from its own sources. The Hungarian economy and population will definitely benefit; the sum to be contributed from the Hungarian state budget to the EU and a number of other figures will be published later. 
One of the important results of the chief negotiators' talks is that the EU qualified the Hungarian regional network as suitable for accession; however, the regional network institutions will have to be prepared for the effective and strictly controlled use of material resources. It is highly significant that, according to currently available data, all of the seven Hungarian regions will be entitled to subsidies under, what is called, objective No 1, according to Endre Juhasz, Hungarian EU ambassador and chief negotiator. 
Although it is not likely to happen, should the GDP per capita rate of the central region including Budapest make it lose its entitlement, the Hungarian side will discuss the issue again. 
Agreement has been reached on the relative proportions of the structural funds. The EU has made calculations based on 10 new members, according to which, Hungary will be allotted 11-14 per cent of the common funds. The three structural funds will provide more than 500m euros in the first year after accession, according to Juhasz's estimates, and the final balance will be drawn after the complete closure of accession talks. Hungary can expect a further 25m euros from two other sources, while the cohesion fund is expected to provide an estimated 299m euros. 
Hungary expects to receive a positive answer to the temporary waiver requests it has submitted to the EU due to the introduction of the simplified entrepreneurial tax [eva]. A Brussels source classified this as an issue that is "relatively easy to solve." 
The competition law chapter is still ahead - the EU aims to complete its discussion by the end of September, though Hungary "prefers achieving real results to meeting artificial partial finish deadlines." Hungarian tax discounts offered to investors need to be harmonized with EU standards; a number of other candidate states are facing a similar task. Warsaw's completion of the domestic and justice chapter is considered to be a breakthrough, as Poland had to shoulder serious border protection efforts and expenses. 

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FOREIGN INVESTMENT

New FDI incentives on the way

The government is planning to introduce a package of new regulations and tax incentives to promote foreign investments as of January 1st 2003, officials at the Economy and Transport Ministry said in mid-July, the Budapest Business Journal has reported.
The new incentive programme will replace the existing tax holidays granted to foreign investors and will comply with EU regulations on competition, they said. "We would like to create a more favourable environment for foreign investors in Hungary not only through tax incentives, but also in many other areas," said Laszlo Csernenszky, deputy head of the ministry department responsible for foreign investments. He said details of the new regulations regarding foreign direct investment (FDI) are being drawn up by three ministers, with Parliament possibly set to vote on the planned changes as soon as September.
In order to pass the FDI promotion package, Csernenszky said Parliament will have to add modifications to next year's law on the central budget. "We plan to introduce the new rules in January, but some of the rules may be introduced even earlier," he said.
While Csernenszky refused to elaborate on the exact structure of new tax incentives to be launched, Economy Minister, Istvan Csillag said at a press briefing on July 16th that the future value of tax holidays and incentives will make up roughly 20% of the total combined amount of investments in Hungary. He also said that the amount of direct state subsidies to attract new investments will be in the range of Ft 20bn-Ft 30bn (€81.2m-€121.8m) next year.
Besides tax holidays, Csernenszky said the new regulations will include the introduction of special state support aimed at helping satisfy the needs of new investors in education and training. He said it is common practice in Western Europe and also in some Central European countries like the Czech Republic, for investors to be granted government subsidies in training new employees.
In an effort to help the implementation of large investments, Csernenszky said the government plans to subsidise infrastructure investments, such as road or railway construction or the provision of public utilities.
In addition, based on agreements with municipalities, the state will provide financial support for investors by granting free or low-cost building plots or industrial sites. Csernenszky said this type of support will be available for investors that focus on research and development activities, those that wish to settle in underdeveloped areas, or those that intend to use local small enterprises as suppliers.
At the July 16th press briefing, Csillag said the government expects that total FDI inflow will reach 10% of the country's GDP next year as a result of the incentive package. This would represent a roughly 50% increase compared to this year's total FDI inflow, estimated to total US$1bn, excluding the profit repatriation of foreign-owned companies.
In the first three months of this year, total FDI directed to Hungary amounted to €81m, only 20.5% of the sum in the same period of last year, according to figures from the Economy Ministry.
The new rules regarding state support for foreign investments will replace Hungary's current tax incentives, which will cease as of this December 31st, according to Csillag.
Csernenszky said existing incentives must be scrapped as the EU deems them against free competition in the attraction of investment.
"Even though Hungry agreed to stop extending new tax incentives in the existing system, we will fight for the right of foreign investors to keep their previously granted tax incentives," he added. 

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INFORMATION TECHNOLOGY

Vodafone offers unlimited GPRS internet access

V.R.A.M. Rt (Vodaphone Hungary) has become the last mobile operator to introduce GPRS (General Packet Radio Service) in Hungary, and the first to offer flat-rate internet charges alongside.
From October 15th, Vodafone Hungary will charge Ft3,125 (€12.50) - including VAT - as a monthly fee for unlimited internet access, including all internet and telephone charges, though in the meantime the service will be offered free of charge for a three month trial period.
"With the launch of our GPRS service, Vodafone would like to help increase the number of internet users in Hungary, which is currently around 17%," said GEO Attila Vitai. He added that Vodafone's GPRS internet ensures access in areas where other flat-rate solutions are not yet available.
Vitai added that telecom leader, Matav Rt's withdrawal of preferential rates for internet users provided a good opportunity for Vodafone to launch it own internet serves.
GPRS enables browsing of WAP pages, but for the internet to be viewed, the mobile handset needs to be connected to a computer.
Vodafone said that, depending on the traffic over the network, the internet can be accessed at a speed of 20-40 kbps.

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PHARMACEUTICALS

GSK Bio aims to beef up local unit

Belgium-based vaccine manufacturer, Glaxo-SmithKline Biologicals (GSK Bio), plans to develop the Godollo plant it has bought from local manufacturer, Human Rt, into a leading Europan vaccine producer by 2005, according to Mihaly Garamvolgyi, the plant's managing director, Budapest Business Journal has reported.
GSK Bio is investing Ft 4bn (€16.25m) into the plant in the next three years. The investment is supposed to cover modernising and expanding production capacity at the unit which manufactures medicines and wholesale drugs like insulin, antibiotics and vaccines for the Hungarian market and for export to Canada, the US and other countries.
Officially launched on July 4th, Glaxo-SmithKline Bilogicals Kft - as the local unit is called - is not part of drug importer GSK Kft, the already existing local affiliate of the international pharmaceutical company, Glaxo-SmithKline.
GSK Bio plans to develop the factor, which is the largest supplier of vaccines of the Hungarian market, into a leading producer of diphtheria, tetanus and whooping cough vaccines by 2005, and expects to eventually export 95% of its products, Garamvolgyi said.
"I trust that joining GSK Bio will allow us to widen our position on both the international and the domestic markets, " he said. "When signing the contract, we also considered the need to provide Hungarian healthcare with a continuous supply of vaccines."
GSK Bio currently controls about 25% of the global vaccine market. GSK Bio announced in April that it had bought the Godollo plant from Human's owner, Israeil drugmaker, Teva Pharmaceutical Industries.
"It was not only the up-to-date production capacity that impressed us, but the outstanding expertise of the team as well," Jean Stephenne, chairman and CEO of GSK Bio, said at that time.
GSK Bio took over the plant from Human along with its staff of 790, technology and know-how, Gramvolgyi said. Teva first acquired a 55% stake in Human when it bought Canadian drugmaker, Novopharm in 1998. It subsequently bought a further 25% from the State Privatisation and Holding Rt (APV) in April 2000 and acquired an additional 18% in a tender in December 2000. In Hungary, Teva also owns Debrecen-based Biogal Rt, Human's main competitor on the local vaccine market.

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