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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: 068 - (01/01/03)

The Hungarians are keen to join all the Western institutions they are eligible for. But so far their record has been mixed.

NATO problems
Recent articles in Foreign Affairs and the Washington Post about the country's performance within NATO since adhesion in 1999, have been far from complimentary. NATO sources have been quoted as saying: "Hungary has won the prize for the most disappointing new member of NATO." Others said: "Hungary would already have been expelled if expulsion were possible."
These scathing verdicts are naturally making Hungarian ministers and authorities disgruntled and keen to make a better impression. Premier Peter Medgyessy went to visit Bush in the US with proposals to commit combat troops to action if required. So far Hungry has committed troops to Kosovo and Bosnia, taking part in peacekeeping and redevelopment missions. The number of soldiers has been limited to platoon (25-30)- or battalion (400)-size forces for such purposes.
The government is maintaining its earlier promises to deploy medical troops; it is likely to stress its eagerness to take part in a European rapid deployment force within the next few years.
The government has also agreed to raise the military budget by 20% to HUF 300bn, making up 1.67% of GNP in 2003, compared with 1.3% in 2002. This will still leave military spending at well below the 2.5% of GDP desiderated for it by NATO for new members.
The real gripe by NATO is less to do with numbers than with Hungary's approach. The previous government of Fidesz under Premier Viktor Orban took entry into NATO as being primarily a political development, not a military one. Certainly, the political motive to anchor Hungary to the West was paramount on both sides in 1999. But NATO also expected Hungary to transform its military from being a Warsaw Pact behemoth to a modernised and professional affair. Soviet-era attitudes based on doctrines of command and control remain endemic and little progress has been made towards developing mobile and flexible forces.
The Ministry of Defence and the top brass are top-heavy with senior and middle-ranking officers, who are resistant to taking the leap from Soviet to Western defence doctrines. Reforms of the administration are foundering on vested interests. There are difficulties in clothing and feeding troops and supplying them out of area, which are precisely what is called for in modern peacekeeping operations, as in Kosovo and Bosnia.
A Western diplomat summed up the predicament thus: "It is still taking Hungary time to appreciate that NATO is not the Warsaw Pact. Under the Warsaw Pact, they were told what to do; but NATO operates differently, by asking countries what they want to do, and expects them to make their own decisions. It is a consensual process."
In the Foreign Affairs piece referred to above, Celeste A Wallander, of the Washington think-tank, the Centre for Strategic and International Studies, said that once inside NATO new members lost motivation to reach Western military standards, and indeed civic ones too. She called for a mechanism of censure, or even expulsion.
Her remarks have a bearing on Bulgaria and Romania as well, which have just been admitted for early inclusion in NATO at the NATO meeting in Prague in November. Indeed in a sense more so, for both have even more organised crime than Hungary and have yet to develop civic institutions to meet NATO's demands for democracy, transparency and human rights.

Economy thriving
The economy in Hungary is doing well in difficult circumstances. With average EU growth at only 0.7%, demand for exports could have been expected to be flat. But in fact the export sector is booming. Foreign trade data in September "exceeded even the most optimistic expectations." Export growth for the first three quarters of the year was 7.1% on an annual basis.
The foreign trade ministry expects export growth to reach a 5-7% range in coming months, while import growth will amount to 4-5%. The trade deficit should diminish by 400-500m Euro, compared with last year, and stand at 3.0-3.1bn Euro. "Hungary's international competitiveness remains solid," the foreign trade minister, Istvan Major, said.
Asked to respond to the good figures in September, he replied that there was considerable increase in exports from customs-free zones. These are used by foreign firms and others to exploit Hungary's excellent location to penetrate Central European and Balkan markets. Incoming FDI is still financing the trade deficit. Hungary has moved into a virtuous circle of growth, ahead of the next European-wide boom. The budget deficit at 9% of GDP is still far too high and inflation is not yet within the 3% needed for Euroland membership. But everything considered the auguries look good.

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AGRICULTURE

Hungarian farmers submit 300 applications for EU's SAPARD fund

From now on, the allocation of the EU's SAPARD [Special Accession Programme for Agricultural and Rural Development] funds will be decided in Hungary. Hungarian farmers will have access to the annual sum of about 38m Euros, Hungarian Radio has reported. 
Agriculture Minister Imre Nemeth said that so far about 300 applications had been submitted for funds of 6bn forints

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BANKING

Hungarian banks attract attention

Hungary, one of Europe's smallest markets, could become the Continent's biggest banking battleground, the Wall Street Journal Europe has reported. 
The government will sell its last retail banking asset, Postabank, next year and some of the world's largest banks will line up to bid. It is the last opportunity to buy market share at a reasonable price. Once Postabank is sold, major players will have to fight for a piece of the growing and lucrative Hungarian banking business.
Analysts say the competition will be so fierce that some big names, such as Citibank, GE Capital and HVB, could be forced to retreat.
"After Postabank, banks will have to think about where they go from there … and you will see some consolidation," said Charles Lucas, a managing director at ABN Amro in London. "You may see some ... mergers but some may be forced to leave altogether."
There are now about 10 full-service banks in Hungary, but analysts say the market will only support five or six. Former monopoly OTP Bank controls about 24% of the market; after that, it is a free-for-all.
"The world seems to have gone crazy, everybody wants to buy a state-owned Hungarian bank… they feel Postabank is the last opportunity to get into the market at a good price," said Tamas Erdei, president of Hungary's Banking Association. "The sector's poised for a boom … and everybody's positioning for that."
Most say the boom has already begun. The banking sector's total assets rose nearly 8% to 9.2 trillion forints (€38.81bn) at midyear from a year earlier, regulator Pszaf said. By comparison, total assets of Polish banks grew just 1.5% in the same period.
A 50% rise in consumer lending is fuelling the market. And 12% growth in real wages and membership in the European Union in 2004 should keep consumers consuming - and borrowing.
Mortgage lending and bank-card use are growing faster in Hungary than anywhere else in the region. This not only underscores why banks are chomping at the bit to do business here, it explains why Postabank is so popular. It is the fourth-largest bank in retail lending and the third largest in household deposits.
Bank profits are also higher than regional rivals. Banks in Hungary posted a 19.43% return on equity in the first half, up slightly from 19.24% a year earlier. In Poland, overall bank return on equity was 9.9% in the first half. In Europe, the average return on equity is expected to be 14.4% in 2002.
The biggest potential for profit is in retail banking, but the market there is fragmented. OTP has a 39% share of retail lending and only two other banks - K&H and Erste - have more than 5%.
Banks with less market share may not survive. They won't generate enough profit to sustain their business because better-positioned competitors will eventually undercut them. And buying new customers will be very expensive and will harm margins.
GE's Budapest Bank has just 3% of retail lending and HVB has 0.7%; Citibank didn't provide data. All three may soon have to close their doors here.
"I don't see Budapest Bank as part of GE's core strategy and Citibank is tiny," said an investment banker in London who asked not to be named. "HVB wants to stay in the region and has grown nicely, but it's still small."

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ENERGY

Hungarian oil company head announces regional expansion plans

According to Zsolt Hernadi, chairman-cum-director-general of Mol Rt [Hungarian oil and gas company], gas price regulation should be put in order, Duna TV satellite service has reported. He said the oil company would suffer serious losses if gas prices did not change next year. [The gas as price is an official price set by the government in Hungary.] 
The head of Mol Rt agrees with the idea that the state will sell some of its Mol shares, with the exception of its golden share [one share with special rights], on the stock market.
Meanwhile, the national oil company is expanding. On 24th November, Mol Rt increased its shares in the Slovak oil company, Slovnaft, to 67.8 per cent. 
Hernadi said: "The Mol-Slovnaft-TVK [the latter is a Hungarian chemical company] trio is an incredibly strong and stable oil company here, in the Carpathian Basin. In the next three years, the company will invest US$2bn in what is called, organic growth, which means either Greenfield investment projects or the development of its existing capacity."
Mol is planning to make significant investments in projects in the Central European region. 
Hernadi continued: "In the next three years we will build 200 new petrol pumps, mainly in Romania, in the South Slav regions, in the Czech Republic and southern Poland. We will start to push out the boundaries of Mol's operations." 
Mol is also showing interest in the sale of the Czech oil company, Unipetrol, and the Croatian oil company, INA. However, Mol's participation in the privatisation of the Polish Gdansk oil refinery has been questioned.

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FOREIGN ECONOMIC RELATIONS

Hungarian-Romanian premiers sign deals on motorway, power line, comment on talks


The Hungarian and Romanian prime ministers have signed a strategic partnership declaration in Budapest. Emese Banhidi reported for Hungarian Radio:
The Hungarian and Romanian foreign ministers will meet to specifically discuss the amendment of the preference law [granting economic preferences for Hungarian Diaspora beyond the borders]. The Hungarian Prime Minister, Peter Medgyessy, said that the Romanian prime minister asked for further clarifications of the law, but evaluated that the amendments met European norms. 
Medgyessy said: "We have agreed that within a week the two foreign ministers will carry out concrete talks, on the basis of which, we shall be able to put a preference law in front of the Hungarian parliament before the year is out, which meets European norms, meets the requirements aimed at improving the circumstances of Hungarians beyond the borders, and naturally, takes into consideration the concerns and views of the neighbouring countries."
Nastase said that it would do no good if he were to point out his objections now because he would tie the hands of the foreign ministers. The Romanian prime minister considered that there was no need for signing another declaration of understanding, because now the text has to be discussed.
Nastase signed a declaration of understanding with former Premier Orban in December last year on the status law. If the two foreign ministers agree that the passages to be amended by the Hungarian government are important and it is possible to include them in the law, he sees no point in signing another declaration, Nastase said.
Peter Medgyessy said that he was pleased that the Romanian prime minister did not change his tone even after receiving the invitation to NATO. "We are in the same alliance, our responsibility is shared, and we have to behave accordingly," the Romanian prime minister stressed.
The two premiers signed an agreement on building a high-voltage electricity cable between Nagyvarad [Oradea, northeastern Romania] and a gas pipe-line between Oradea and Szeged. An agreement was also reached about the construction of a Budapest-Bucharest motorway.

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PHARMACEUTICALS

Egis eyeing higher sales figures on CIS markets

Hungarian pharmaceutical group, Egis Rt, said it will raise its sales by more than a quarter on CIS markets, according to Bluebull. The figures will likely top its predicted 10 per cent growth in central and eastern European states, and exceed the eight per cent rate Egis expects to report in Hungary in its current fiscal year, which will end on September 20th, 2003. 
The company said sales in Western Europe and the US will increase by US$1m. Deputy CEO for Finances, Laszlo Marosffy, said domestic sales will climb 3.2 per cent because of higher drug prices. Egis said it will introduce six new drugs in the coming months. Three of these may generate sales of HUF 400m each for the company, Marosffy added. 

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RETAIL INDUSTRY

Electro World unit eyeing network expansion


Electro World Kft, a subsidiary of the UK-based electronics group, Dixons Plc, announced it will maintain its expansion plan and open two new stores in 2003. The company inaugurated its second store in Hungary recently, the Budapest Business Journal reported. "We will open a new store in a plot near the Cora hypermarket in Budakalasz next spring," Electro World country manager, Peter Sebestyin was quoted as saying. "And the third store will be followed by another in the second half of the year." Sebestyin did not reveal the location of the store. According to him, talks have been launched concerning a number of potential sites. Constructed on a plot near the Auchan hypermarket in District 23, southern Pest, World 2 covers an overall retail space of 4,400 square metres, just like the biggest Dixons shop in London.

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