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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: 070 - (21/02/03)

The crisis over Iraq overshadows domestic issues in Hungary, which has taken a stand backing the US over the coming war. The Hungarians remember 1956 when they rose up against their Soviet oppressors and no US help was forthcoming.
It is often said that this was because the revolution coincided with Suez. Khrushchev recounts in his memoirs that he felt relief on hearing of Suez and knew then that he could send in the tanks. Actually any Soviet leader at this stage in the Cold War would have had to do what he did or be removed. The rules of the Cold War game had already evolved to include what came to be called the Brezhnev doctrine, no overt interference in the internal affairs of the other side's zone, even if that involved condoning an intervention by the hegemon of either zone in the internal affairs of a component state. The US would of course denounce the invasion but not act, any more than the USSR would more than ritually object to the CIA toppling say the Arbenz regime in Gautemala in 1954. Well this time, there is no Cold War restraint and Bush junior is going to conclude the 34-year old Iraq Civil War since Saddam's seizure of power by a short, sharp deployment of the US's advanced weaponry. Hungarians are applauding.

Museum of Horror
The Fidesz party of former premier Viktor Orban, lost power, but only by a whisker, to ex-communists of Premier Medgyessy last year. Fidesz were unscrupulous in trying to discredit their opponents by setting up a Museum of Horror in the former secret police headquarters of the communists in Budapest. Its opening in the course of the electoral campaign was a coincidence, says Orban. No-one believes that, nor that it is a coincidence that it concentrates on communist horrors alone, ignoring the spell of fascism in Hungary when the Arrow Cross, Hungary's home-grown version of the same, took over in March 1944 for a brief, but utterly disastrous, turn in power. Nearly one million Jews were dispatched to the Holocaust during its rule, under the supervision of Eichmann.
Some of Medgyessy's Cabinet want it closed down. But the premier himself, an admitted police informer in the 1970s (by which time the regime had relaxed), is wisely opposed to that. Hungarians do need to come to terms with their past, and one way is by having a Museum of Horror.

The economy still the key
The premier never stops insisting that the key to success lies in economic redemption. The preceding government did pretty well, which is why they only just lost the election.
The formula of the Hungarian reformers, who abound in the Socialist Party, is that of encouraging FDI. But foreign investment tends to congregate in the capital and the western areas of the country. The eastern regions are generally neglected.
The government is intending to redress the imbalance by earmarking funds for regional development. A total of US$176m is being spent on regional projects; but this is a drop in the ocean in a country the size of Hungary. Once inside the EU, due in 2004, Hungary will be able to draw on far larger sums for regional reconstruction from Brussels. That is what everyone is waiting for.

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AVIATION

Budapest eyed as centre for budget flights


Several budget airlines have shown interest in using Budapest's Ferihegy International Airport as a key terminal for regional business - but warn that other nearby destinations have just as many attractions, the Budapest Business Journal has reported. 
Airlines currently in talks with airport operator, Budapest Airport Rt, include well-known names like Dublin-based Ryanair Holdings Plc and Brussels-based Virgin Express Holdings Plc, as well as the executives behind a new regional budget airline to be called Arc Air, according to Budapest Airport CEO, Gabor Hidvegi. One of these companies has already applied for permission from the Hungarian airline authorities, he revealed, without identifying which one.
"There are vast unwashed masses in Eastern Europe longing to move around. We want to fly them," said Steven Kopits, CEO of venture capital company, Arc Investment, which is behind Arc Air.

Malév leases new airplanes, aims for regional dominance

In late January, Malév Hungarian Airlines Rt received the first of 18 Boeing 373 NG aircraft which the company will lease over the next three years, the Budapest Business Journal has reported.
According to Malév CEO Jozsef Varadi, the airline will have the youngest fleet in Europe in a few years as a result of the programme.
"We call it the deal of the century," Varadi said, explaining that the lease contract was signed with the International Lease Finance Corporation (ILFC) in 2001 after the tragic events of September 11th, and includes very favourable financial conditions for Malév. He added that the company will pay less to lease the new aircraft than it did for the older ones.
The new Boeings will replace Boeing Classic and Fokker aircraft operating on mid-distance destinations. In line with the lease of the new Boeings, Malév is developing its Bombardier CRJ-200 fleet, with it uses for regional operation. This year the company will receive two Bombardiers and has an option to buy six more.
According to Varadi, Malév intends to become the leading regional airline by developing its short-distance fleet. "We will continue regional expansion. In 2003, the number of flights will increase by 15%," he said.
Varadi said that Malév will have a uniform, standardized fleet in a few years, something that will significantly reduce maintenance costs. The new aircraft will also allow more economic operation, he added.
In 2002, Malév carried a total of 2.2 million passengers on its scheduled flights, 1% more than in 2001. Varadi described this as a very good result, as the overall number of people taking flights has significantly decreased on both European and American networks. 

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BONDS

Government to forge ahead with 1bn Euro bond issue

The Hungarian government said recently it will not delay an upcoming €1bn foreign bond issue, despite analysts' warnings that current market conditions would negatively impact the transaction.
Finance Minister, Csaba Laszlo, told newswire MTI that negative world economic trends and a potential war in Iraq would present much larger risks in the second half of this year than at the scheduled date of the upcoming issue.
Analysts expressed their concerns after the State Debt Management Rt (AKK) announced recently that it planned to sell €1bn of ten-year euro-denominated bonds on international capital markets in late January or early February.
Managed by Dresdner Kleinwort Wasserstein (DrKW) and Schroder Salomon Smith Barney (SSSB), the issue is intended to help Hungary re-finance public debts maturing later this year.
Analysts said the increased influx of foreign portfolio investments to Hungary in the past few months would mean reduced demand for the new bonds.
According to estimates cited by online business portal portfolio.hu, the total amount of foreign portfolio investments alone directed to Hungary recently exceeded €1bn, something attributed mainly to speculation that the central bank would intervene on the strong edge of the forint fluctuation band. This speculation proved well-founded.
Laszlo Buzas, deputy CEO of AKK responsible for foreign issues, confirmed recently that the scheduled date of the bond issue is not likely to be changed and preparations for the transaction have already started.
The lead managers of the transaction organised a European roadshow at the end of January to market the benchmark eurobond to potential investors, said Petri Kivinen, director of emerging markets global debt origination with DrKW in London. He said the roadshow took place on January 27th-30th and included marketing presentations in Germany, Italy, France, the Netherlands and the UK.
"Investor appetite for Hungarian sovereign securities is increasing as the country proceeds towards EU membership and eventual accession to EMU," Kivinen said. He added that Hungary's coming EU accession is likely to increase the number of investor groups interested in Hungarian government securities.
Buzas at AKK said Hungary's foreign currency public debt maturing this year amounts to about €1.5bn, which the government plans to refinance through further foreign bond issues later this year. Recently, Finance Minister, Laszlo, was quoted as saying that another €1bn bond issue may be in the pipeline.

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ENVIRONMENT

ISPA funding for environment, water management programmes

Hungarian ISPA environment and water management programmes will receive HUF 10.385bn (US$47m) in co-financing deals from the Environmental Ministry, Interfax News Agency quoted Minister, Maria Korodi, as saying. 
The government will start several projects in the coming months, such as regional waste management programmes in Hajdu-Bihar County, and the cities of Miskolc, Szeged and Szolnok. Sewage treatment facilities will be developed at Szeged and Gyor, the minister added. The EU's ISPA fund will also subsidise various projects by next autumn and will get off the ground at the start of 2004. The government hopes to launch regional waste management programmes in the plains area between the Tisza and Danube rivers, around Tisza Lake and in the Sajo-Boldva region. Water management programmes will emerge at Pecs and Sopron, Korodi was quoted as saying.

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FOREIGN INVESTMENT

Bosch to expand plant in Eger

German engineering and machinery manufacturer, Bosch Rexroth AG, is planning to invest several million euros to upgrade and expand its production capacity in the industrial park of Eger, northern Hungary, Budapest Business Journal has reported.
The park's operator, Eger Industrial Park Kft, has been in talks with the German company for several weeks and is likely to reach an agreement soon, the operator's managing director, Csaba Szabo, said.
The investment will expand the production of pneumatic machinery maker, Bosch Rexroth Kft (BRHV), which has been operating in the park since mid-2001, Szabo said. He declined to give the exact amount Bosh Rexroth plans to invest.
"One factor that is attractive to Bosch is that it can use the existing workforce in the industrial park," he said.
Bosch Rexroth would employ the 140 workers of its existing Hungarian subsidiary and would increase the total number of employees to over 400, according to a source familiar with the negotiations. That source said the total amount of Bosch's investment would reach €10 million.
Bosch Kft spokesman, Robert Raveczki, would neither confirm nor deny the information about the company's expansion and development in the Eger Industrial Park.
The German parent company has been actively expanding its Hungarian operations in recent years and currently operates production subsidiaries in Budapest, Hatvan, Kecskemet, Miskolc and Eger. The company recently announced that it will move the European headquarters of its automotive electronics division to Hatvan and will start the production of automotive parts in Miskolc this year.
According to the company's announcement last November, Bosch will move a significant portion of its automotive parts production from its plant in Hildesheim, Germany, to Hungary. That will result in 830 jobs being lost at the German plant by 2005.
Bosch established an electronic tool manufacturing subsidiary, Robert Bosch Power Tools Kft, in Miskolc last year with an investment of about Ft 5 billion (€20.45m). That company is expected to complete the construction of a new facility by the middle of this year and is scheduled to employ 500 after reaching full production capacity in 2006. 

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INFORMATION TECHNOLOGY

HP unit introduce "Intelligent Campus"

The Hungarian subsidiary of Hewlett-Packard announced it will supply the Nyiregyhaza College with its "Intelligent Campus" facility management and IT infrastructure solution, according to Interfax News Agency. Worth HUF 1.5bn (US$6.7m), the project comprises conventional facility management functions, like security, HVAC and utility supervision, in addition to "intelligent building" functions, like broadband Internet connection, IP technology and data security equipment. Hewlett-Packard Hungary told Interfax it will install the system, which will include financial and accounting software customised for institutions of higher education. The company will set up the system at two of Nyiregyhaza's campuses, which were constructed in 2002. The "Intelligent Campus" system is based on the BuilDog software, developed by Hewlett-Packard Hungary's software developers and already used in various European projects.

Software developer expects swift growth after injection

Software developer rEVOLUTION Softeware Kft hopes to bolster its market position and get listed on the Budapest Stock Exchange Rt (BET) within five years, following its partial purchase by Greece's Q&R SA, the Budapest Business Journal has reported.
The investor, which is listed on the Athens Stock Exchange, paid €1 million for a minority stake in the Hungarian company, the companies announced recently. Both companies specialise in enterprise resource planning (ERP) software.
"The goal of the cooperation is to utilise both companies' market positions, experience and knowledge of local and regional markets," said Panagiotis Paschalakis, Q&R's president. "The Hungarian ERP market is prosperous and there is a great opportunity to win EU and Phare-financed Central and East European software development projects."
Q&R chose rEVOLUTION after examining the Hungarian ERP developers' market, Paschalakis said. "Q&R has been looking for a dynamically developing Hungarian company that has good domestic market experience," he added. "Q&R wanted to establish long-term cooperation by strengthening the Hungarian partner via a capital injection."
By the end of 2002, the two companies had already started developing software, as a result of which rEVOLUTION will soon launch a new ERP product that will be at the top of its range.
Hitherto fully owned by Hungarian individuals, rEVOLUTION plans to increase sales to €2 million in 2003, General Manager, Norbert Bodog, said. He added that the company hopes to boost its net profit to €360,000 this year.
There is still plenty of room for growth on the domestic market, according to Zsolt Juhasz, rEVOLUTION's integrated systems branch director.
"There are more than 1,000 medium to large companies out there that don't use ERP systems," he said.
News Agency Bloomberg reported, without citing sources, that Q&R bought 35% of revolution on December 18th. Company executives declined to comment on either the size of the stake or the purchase date. 

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MINERALS & METALS 

Late deal stops DAM Steel's Italian investor from selling

Italian steel company Cogne Acciai Speciali srl, is likely to revise earlier plans to sell its Hungarian subsidiary DAM Steel Rt after the latter reached an agreement with regional electricity distributor Emasz Rt over the purchase of a transformation substation at DAM's site in Miskolc, The Budapest Business Journal reported.
"We received an offer from DAM Steel and its banking partner and it seems we have an agreement regarding the purchase price," said Norbert Boross, spokesman for the Hungarian subsidiaries of German utility giant RWE AG, which holds the majority of Amasz. He said further details of the purchase, including the method of payment, are yet to be finalised.
Cogne announced earlier in January that it would pull out of DAM Steel if the subsidiary's management failed to reach an agreement with Emasz by a January 17th deadline. The current agreement is expected to put an end to the long-running dispute between DAM and its power supplier, which forced the steel company to temporarily halt production at the beginning of January. Istvan Ban, DAM's production director, said recently that it is still uncertain when production can be resumed.
"Talks will take another week before all the details are clarified and we can restart production," Ban said. He added that DAM or its banking partners are likely to pay the purchase price in instalments this year. While he declined to name DAM's banking partners in the transaction, banking sources who wished to remain anonymous said they probably include the two Italian-owned commercial banks operating in Hungary, CIB Bank Rt and Inter-Europa Bank Rt. Both banks have been financing DAM's operation for the past two years.
The dispute started at the end of 2001, centring around a transformation substation currently owned by Emasz. The substation originally belonged to the former Diosgyor Steelworks Rt, which went bankrupt. Its assets were bought by DAM Steel, which also took over some of the defunct firm's staff. Before that happened, it sold the substation to Emasz for Ft 397m (€1.69m) in order to be able to settle its debts to the electricity provider. During the liquidation process, Cogne bought the assets of DAM in 2001 and has been seeking to buy back the substation in order to reduce its electricity bill.
In 2001, Emasz set a Ft 1.4bn price for the substation, but it is believed it might have accepted DAM Steel's earlier offer of Ft 500m during recent price negotiations RWEs Boross, however, declined to reveal the purchase price the two parties finally agreed on recently. 

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PHARMACEUTICALS

Higher subsidised drug prices at hand: report

Subsidised medication prices will rise by about 4-5% in the near future, Interfax News Agency reported. Although no official announcement of the new prices has been disclosed yet, the rate is more than the 3.2% average increase previously announced by the National Health Fund (OEP). Health Ministry department chief, Jozsef Hamvas, was quoted as saying prices of cheaper, typically locally produced generic drugs (with a per box prices of less than HUF550) will increase by a more than average 10-13%. 
The government approved price hikes for these drugs to prevent them from being taken off the market, Hamvas said. According to producers, they cannot keep producing low-priced medications if prices don't rise. New drugs that will be funded from the beginning include those that treat Parkinson's disease and some cancer drugs. The ministry has inked price-volume contracts with the makers of these products. As per the deals, prices and funding are set for an estimated volume of the new drug, with the maker repaying OEP for a certain percentage of over-spending, according to Interfax. 

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TELECOMMUNICATIONS

Vivendi sale seen boosting telecom market

A recent buyout of Vivendi Telecom Hungary Rt (VTH) by a financial consortium part controlled by American International Group Inc (AIG) could lead to further consolidation on Hungary's telecom market and stronger competition for incumbent leader Matav Rt, analysts and executives said.
Alternative telecom PanTel Rt, in particular, was cited as a possible next target for investors, the Budapest Business Journal reported.
"VTH represents an exciting opportunity to participate in what could potentially be one of Central and Eastern Europe's most attractive telecommunications markets. We're happy to take over the strongest competitor and are fully committed to strengthening its market position," said Craig Butcher, managing director of AIG Global Investment (Hungary) Kft.
Butcher's company manages private equity fund AIG Emerging Europe Infrastructure Fund LP (EEIF), which made the purchase in a consortium with another fund, GMT Communications Partners LP, which focuses on investments in telecom, IT and the media.
Butcher said that VTH is the leading telecom provider within its concession areas in Hungary, with an excellent franchise and stable recurring revenues from its extensive residential and corporate customer base.
No purchase price has been disclosed. The deal is still subject to approval by VTH's creditor banks and by regulatory authorities. It was expected to be finalised by the end of February.
French owner Vivendi Universal SA, the world's second largest media company, was said to be hoping to get €450m from the sale, part of its radical debt-restructuring program.
However, with the target company's debt approaching €300m, the consortium is more likely to pay somewhere between €100m and €150m, according to Andor Daroczi, an analyst at ConCorde Securities Rt.
Daroczi added that although VTH has fairly good cash flow and is able to finance its own debt, he does not expect growth in its fixed-line business, adding that it may even experience shrinkage in revenue terms. "This may be a prelude to greater consolidation. It doesn't make complete sense to buy Vivendi by itself," he said.
Butcher said the fixed-line business is still viable without mobile investments, though he said the AIG fund would not rule out mobile investments in the long run.
Timothy Green, senior partner at GMT Communications Partners, said a fixed-line investment on its own is sensible. "There is stagnation in the fixed sector, but it's stable as a core business and has good infrastructure. There is a lot of opportunity for growth from internet and data communications," he said.
Green added that there is strong potential to develop VTH into a leading provider of broadband services in Hungary.
GMT and AIG will be joint owners of VTH, which will change its name, though some brands may keep theirs, said Butcher. "The business will operate as normal," he stressed.
VTH CEO, Sandor Polanyi, said he expects no key changes in target and focus. Regarding the consortium's long-term intentions, both Green and Butcher said investments of this scale are usually for a five-year period. Daroczi at ConCorde said he expects a strategic investor to buy out the new VTH before five years elapse, perhaps even after two.

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TRANSPORT

Ministry seeking HUF 40bn in funding for motorway projects

Hungary's Economy and Transport Ministry is expecting to collect an annual HUF 40-60bn from the European Union's cohesion and structural funds for motorway projects, from 2004-2006, Minister Istvan Csillag said, quoted by Interfax News Agency.
"Thus in the three years the ministry calculates that there will be HUF 150bn in aid from the EU," he said. As per the ministry's plans, 300km of new motorways or other roads will be finalised within the next three years. But if the economy accelerates and privatisation revenues come in earlier than expected, the motorway development programme could be completed ahead of schedule. 

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