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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: 071 - (27/03/03)

Unsettled times
Hungary is not happy about things at the moment. Another war to its south, admittedly further away this time, is not reassuring. Hungary is cooperating with the US, giving it not just diplomatic support, but a base in the south to train 3,000 special forces to enter Iraq by air and engage in special operations on the ground.
Loyalty at governmental level to the leader of the West is paying off in certain ways, but not all. It ensures Hungarian adhesion to NATO, already an accomplished fact, despite Hungary's own forces not yet being up to NATO standards. But it has not helped the cause of joining the EU on advantageous terms, given the intransigent opposition to war of Germany and France, who dominate the Union, at the moment better termed the European Disunion.

Life has to go on
Despite the trying times, everyday life goes on. And the government has plenty of problems at home. The economy is not faring brilliantly, despite certain successes. Inflation has been brought right down so that a target of 5.2% is being set for this year. FDI has been attracted in large quantities.
But there are problems of poverty and unemployment, particularly in the rural areas. Budapest is a boom town where the bulk of the more than US$20bn FDI is concentrated; but elsewhere things are different.
One way to rectify this is being adopted, to develop a series of EU - style motorways by 2015, criss-crossing and unifying the country. Foreign investors have been wary of going outside the greater Budapest region for fear of encountering inadequate infrastructure, especially in transport, a vital sector for exporters.
The EBRD and the EU, along with the European Investment Bank and local commercial banks are to provide the bulk of the fiancé, some HUF 1-1.1 trillion (around US$5bn). By 2015 Hungary will have reached EU standards in extending their motorway area so that nobody will be more than 30 minutes from a major road. The impact on the outer regions should be profound, diversifying their economies and attracting FDI.
It was always going to take time to effect a transition in Hungary. 2015 will be a quarter of a century after independence in 1989, exactly a generation, which could have been predicted then was the time required. The EU will be playing a vital part.

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Weslin Hungary forces supply agreement with VW and Renault

The Oroszlany-based group Weslin Hungary Auroipari Rt, the Hungarian arm of Weslin Industries Inc, the European joint venture of Canada's Wescast Industries and Linamar Corp, announced it has forged an agreement with two leading carmakers, French Renault and German Volkswagen, for the supply of exhaust manifolds for passenger vehicles, according to the Budapest Sun. The agreement is good for a period of five years. 
Due to start in 2004, Weslin will supply 400,000 low manganese, high-quality iron manifolds to the French carmaker's plant in Spain, for the latter's new 1.5-litre turbo-diesel engine project, each year. Effective in 2006, Weslin will supply a further 200,000 compact graphite manifolds to the German group's engine plant in Polkowice, Poland, for its new 2-litre diesel for the VW Golf 5, SEAT Ibiaz, SEAT Leon/ Toledo, Skoda Fabia and Skoda Octavia models

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Fitch affirms long-term foreign, local currency ratings

Fitch Ratings, a global rating agency, has affirmed Hungary's long-term foreign currency and local currency rating at A- and A+, respectively. The short-term rating is affirmed at F and the outlook is stable, the agency said in its report.
"While there were marked deteriorations in several credit indicators last year, most notably the much higher fiscal and current account deficits, the affirmation reflects offsetting effects drawn from some of the country's fundamental rating strengths," Fitch said, reports Interfax News Agency. But a key macroeconomic policy response must emerge this year to ensure more pronounced erosion in credit quality that would prompt a review of the ratings, Fitch added.
Last year's general government deficit totalled HUF 1.6 trillion, accounting for 9.7% of estimated GDP. The deficit grew two-fold in 2002, with the increase due mainly to election-driven spending, a number of "one-off" expenditures and "recognition of certain off-budget expenditures" under a clearer accounting framework, the agency said.
Fiscal credibility was hit by the magnitude of higher spending, Fitch said, adding that medium-term fiscal estimates change and threaten the country's ability to meet the Maastricht criteria within the next two years.
The agency said the budget was amended thrice last year, which weakened the "integrity of the annual budgeting process and again casting doubt on medium-term fiscal forecasts."
General government debt relative to GDP reversed an eight-year trend by increasing at the end of last year to 56%, Fitch said, adding it is high relative to the 38% median for a sovereign. "However, the country's debt-to-revenue ratio remains below the peer median," the agency said.

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MOL offloads more gas units

Oil and gas company, MOL Rt, continued to shed stakes in its gas business as it prepared to free up assets ahead of a planned regional acquisition spree, the Budapest Business Journal reported recently.
MOL, which recently made offers to acquire control of Croatian oil company INA d.d. and the Czech Unipetrol AS, sold its 50.11% stake in Gerecsegaz Rt to Turulgaz Rt for Ft 175m (€717,000).
The sale was the company's latest divestment in the retail gas sector after selling its stakes in Zambekgaz Rt, MOL-Gaz Kft and Turulgaz to Tigaz Rt on January 31st for a total of Ft 20.6bn, more than double their combined book value. Tigaz is a subsidiary of Italy's Italgas SpA.
Analysts predict MOL will continue to rid itself of its stakes in the gas retail distribution sector and may even exit the gas market altogether, including its wholesale gas segment.
"The divestment could be an indication that MOL wants to exit the gas business," said Tamas Pletser, analyst at Erste Bank Investment Hungary Rt, adding that the firm's entire gas division could be sold for well over the Ft 100.3bn book value if upcoming legislation follows through on the announced liberalisation of the gas market.
Plester predicted that MOL's next sell-off will affect its minority stakes in regional gas distributors Egaz Rt and Degaz Rt, which had a combined 2001 book value of Ft 12.1bn. 
Bidders for MOL's gas units could include French energy giant Gaz de France, Germany's Ruhrgas AG and Russia's OAO Gazprom, in the view of Plester and other analysts.
Others question the timing of a potential exit by MOL from the gas market.
Domestic price caps in recent years inflicted heavy financial losses on MOL as the price of gas imports soared. In 2001, the company's gas business posted a Ft 120bn operating loss, bringing the company's net income into the red for the first time since it was privatised.
If the new gas law is approved later this year, MOL could sell gas at market prices beginning next January, although retail consumers would continue to benefit from subsidies.
"The price liberalisation would make the company's profit structure a lot more predictable," said Jozsef Miro, director of equity research at Cashline Securities Rt.
But profits from the gas units could be limited Miro added, as the government, which retains a 25% plus one share stake in MOL, could be tempted to meddle in the company should the sector prove very profitable.
The gas business divestments come at a time when MOL is hoping to become the dominant petrochemical company in Central Europe through the acquisition of rivals in the region.
The company has already agreed to increase its stake in Slovakia's Slovnaft a.s. to 67.8%, and is now bidding with that subsidiary for a 63% stake in Czech firm Unipetrol.
MOL is also in the running to acquire 25% plus one share in Croatia's INA. Information leaked to the Croatian press indicated the Hungarian company submitted the lowest bid for INA - US$300m out of the three bidders. The other two are Austria's OMV AG and Russia's Rosnyeft.
The Croatian government asked all three companies to up their bids, but added that the proposed business strategy will be more important than the final price tag when the winner is selected in March.

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Hungary drafts plan for use of EU funds after entry

In the framework of the National Development Plan, there is an opportunity for development projects worth 1,200-1,500bn forints [one dollar is about 230 forints] in the first three years of EU membership, financed by funds to be received from the EU and from national co-financing, Hungarian Radio has reported.
The information was given by Etele Barath, state secretary at the Prime Minister's Office, at a session held by parliament's Economic Affairs Committee. 
He said the document, which was still to be consulted with Brussels, included five programmes. More than half of the EU funds will be spent on motorway construction and environment protection investment projects. The application system will be set up by the autumn, the state secretary added.

Hungarian government allocates money for regional development

The country's seven most disadvantaged regions, among them Jasz-Nagykun-Szonok county [east-central Hungary], will get extra support worth almost 25bn for regional development, Hungarian Radio has reported. This was decided by the government session, held in the provinces. 
In the town on the river Tisza [Szolnok], Employment and Labour Minister Peter Kiss signed an agreement with the county assembly chairman, Istvan Tokar, on the invitation of tenders for public works worth 127m forints to improve the county's flood defence.

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Unilever rebrands local ice creams

Unilever Hungary Kft, the local subsidiary of global consumer goods giant Unilever, will launch a large-scale branding campaign for its newly introduced premium ice cream brand, Algida, from March 2003, the Budapest Business Journal reported.
The Algida brand, which is gradually replacing Unilever's Eskimo brand on the local market, will also serve as an umbrella brand in Hungary, incorporating individual brands such as Magnum and Carte d-Or.
Unilever is the world's leading producer of ice cream, with sales in more than 90 countries. The company's main household brand names include Algida, Langnese, Ola and Wall's in Europe, and Ben & Jerry's Good Humor and Breyers in the US. Ice cream products such as Carte d'Or, Cornetto, Magnum, Solero and Vienetta are individual brands that are sold internationally.
Currently, Unilever is marketing its ice cream products under the Algida brand in 13 countries. The Algida brand name was created in Rome in 1947, where Unilever's ice cream innovation headquarters is currently located.
Algida Italy has been a leading innovator within the group. It has introduced several leading international ice cream products, such as Cornetto and Calippo.
Unilever is currently producing its Eskimo product line in its Veszprem-based factory, including variations of the Vienetta, Magnum, Carte d'Or and Cornetto

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Orco launches apartment hotel

With a more than €5m investment, MaMaison Residences, a subsidiary of the Luzembourg-based Orco Property Group, opened Residence Izabella, its first extended-stay hotel in Budapest, in early February, the Budapest Business Journal reported.
The five-star hotel is the first member of a chain the developer aims to build in Central Europe, with further openings planned in Prague and Warsaw in 2003 and 2004. The European Bank for Reconstruction and Development (EBRD) has agreed to invest €10m in the programme.
Situated near the Oktogon crossroads, Residence Izabella offers furnished residential apartments and hotel services.
Housed in a fully renovated 19th century building, Residence Izabella consists of 38 large, furnished apartments offers separate bedrooms, fully equipped kitchens, lounge, dining area and entertainment facilities.
Services proposed include breakfast, room service, laundry, concierge and secretarial services, massage and fitness facilities. Residence Izabella chiefly targets visitors on stays of a few months or longer.
The residence also features a fitness club, a bar, a pool room, a home theatre, business facilities and private parking.
Orco was founded in 1991, and focuses on real estate and hospitality investments in Central and Eastern Europe. 

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Managers buy Nextra from Telenor

A desire on the part of Norwegian telecom, Telenor ASA, to focus on its core business and sell off loss-making ventures lies behind its divestment of ISP Nextra Hungary Kft, representatives of both companies said recently, Budapest Business Journal reported.
Telenor sold Nextra to a consortium of Nextra's management and outside private investors.
"This is in line with our strategy rethink from the third quarter of 2001, when the market turned and we decided to focus on our core activities," said Dag Melgaard, Telenor's chief press spokesman.
He added that Telenor is prepared to keep hold of non-core assets that are profitable, or that are at least in third position in their respective markets. Melgaard would not disclose the price of the sale of Nextra Hungary. Neither would Nextra Hungary's managing director, Robert Line, who only said that the deal was as close to benefiting both sides as possible.
"The buyout relied on help from key managers, and capital come from private funding from what could be termed angel financiers, though not venture capital firms," Line said.
He said a relationship will continue, in which Nextra will use art of Telenor's bandwidth and carry on developing services for its former owner. He welcomed the fact that Nextra will no longer bear the responsibilities incurred by being part of an international organisation.
"We have a workable relationship and are comfortable with the prospect of fewer overheads. We've found another week of time per year - there'll be less time sitting in board meetings," he said.
The new owners' primary goal is to build a profitable venture they can exit in three to five years, according to Line.
"We will focus on profitable products and those things that make sense for Hungary," he said. There will be no significant restructuring, he added.
Telenor sold its ISPs in Germany and Switzerland last year, and is also selling its Austrian ISP, Melgaard noted.
Nextra will continue its cooperation with the ISPs that Telenor has sold, according to Line.
Telenor has no plans to sell mobile content developer Digitania Rt, Melgaard said. It also remains full owner of Hungary's number two mobile player, Pannon GSM Rt.
Nextra Hungary employs 50. Its predecessor, Pronet, was both by Telenor in September 1999 at a price rumoured to be around US$2.5m.

Matav loan to re-finance Westel buyout

Hungary's incumbent telecom, Matav Rt, will raise up to €550m by the summer to re-finance a loan from its parent Deutsche Telekom AG, the company announced recently. The new loan does not signal any kind of financial crisis, industry analysts said, the Budapest Business Journal reported.
Matav needs new financing to replace a €690m loan, expiring in August, that it borrowed from Deutsche Telekom to buy the outstanding shares in its mobile subsidiary Westel Rt last year. Matav increased its stake form 51% to 100% as a result of the deal.
"We are free to go to the capital markets. Investment banks are already knocking on our door," said Deputy CEO, Klaus Hartmann, adding that Matav may also try to borrow the cash once again from Deutsche Telekom, and not from commercial banks. He did not disclose any names of possible banks. Matav earlier took out a €920m loan from Deutsche Telekom at an interest rate of 50 basis points above Libor.
It has already repaid €230m of the total and will repay the other €140m from its own cash flow, president and CEO, Elek Straub said.
Matav had until the end of December 2001 to pay US$885m for the stakes, in a deal that analysts say leaves Matav as a privileged member of the DT group, with a similar company structure to its parent and greater control over its operations. 
At a time when Matav is seeing its revenues from fixed-line telephony squeezed on the domestic market, the deal secured a major new source of revenue for the firm, said Imre Sztano, co-head of Central and East European equities at Vienna-based Erste Bank AG.
The current move is in line with expectations, according to Sztano, adding that the financing route, be it through its parent or through commercial banks, is simply a matter of who offers the best terms.
He added that Matav converted a large part of its foreign exchange exposure has now dropped to 15% of total loans.

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Government outlines road construction plan

The Hungarian government plans to spend a total of Ft 1,100 (€4.48bn) in the next four years on building motorways and other roads in the framework of the Europa Plan, reports the Budapest Business Journal, as the country needs to bring its transport network closer to EU standards, Economy and Transport Minister, Istvan Csillag said at a press conference recently.
The road construction plan up to 2015 aims to reduce disparities in infrastructure between the eastern and western regions of the country, he said.
The country has 6.8km of highway per 1,000 sq. km, which it wants to increase to 27km by 2015, approaching the average among current EU members, Csillag said.
"The program will redraw the map of Hungary," he added. "It will also set the framework for planning the budget in coming years."
Hungary will add 420km of highway, including 326km of motorway, to its existing fast-road network of 633km by January 1st, 2007, Csillag said. The country will also begin construction of a further 425km of motorway, between 2003 and 2006, he added. In the same period, he said, preparations for building an additional 800km of road can be begun.
In the framework of the motorway program starting this spring, construction of the M0 ring motorway will be continued. The M3 is set to reach Gorbehaza by 2004 and Nyiregyhaza by 2006. The M30 motorway is scheduled to reach Miskolc by 2004. By the end of the present government cycle, highway 6 will be upgraded to a motorway between Dunaujvaros and Budapest. According to Csillag, the M35 motorway will be extended to Debrecne by 2006, and the M5 will reach Szeged in the same period.
Csillag said the government will take out loans under favourable terms from the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD), and will also use funds from the EU to finance the project.
This year the government will spend Ft 79.4bn on road developments, as allocated in the central budget law. In 2004, it will spend Ft 270bn on the same purpose, an amount that will further increase in the following years.

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