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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: 072 - (17/04/03)

Medgyessy in Le Monde
The Hungarian Prime Minister, Peter Medgyessy, contributed an article to Le Monde on April 10th, ahead of the signing of Hungary's accession to the EU on April 16th, a red letter day in the country's calendar. Le Monde is a leading quality newspaper in France, read by the entire political establishment from right to left. Medgyessy was clearly trying to mend fences with the French elite, with whom ties had been ruptured by Hungary's stance on the crisis in Iraq.
For Hungary has taken a very different line to that of France and Germany on the issue and it, together with Romania and Bulgaria, were rebuked by Chirac for doing so before the war began. He said that certain countries, referring to the signatories of the eight-nation statement and of the Vilnius-10 in support of the US position on Iraq "had not helped their cause in Europe." Hungary was one of the eight nations. Moreover, it has extended air base facilities to the US, permitting the training of 3,000 Iraqi special forces in the south of the country for readiness to be used in Iraq. Indeed a small contingent of Hungarian forces participated in military operations in southern Iraq, along with 200 Poles, 2,000 Australians and extensive US and UK forces. 
Being companions in arms with the US and the UK is a popular policy in Hungary, which sorely missed their help in resistance to another tyranny in 1956. Perceptions about the conflict in Iraq are quite different in Eastern Europe than in France and Germany or for that matter than in Italy and Spain, all of which suffered terribly from war in the first half of the twentieth century.

The EU beckons: the bounty for Europe
The Hungarians know that the future of their country is now inextricably tied up with the EU. They have the most open economy in Central Europe, host to well over US$20bn in foreign investment in a country with only 10 million people. The entry into the EU can consolidate this internationalist profile. Budapest, indeed, is a highly cosmopolitan city, suitably so in one of the two former capitals of the Austro-Hungarian Empire, the Dual Monarchy. Slovak, German, Romanian, Croat and Romany are all heard on its streets as well as Magyar. Since the days of art nouveau there has been a strong cultural bond with France and Germany.
Medgyessy, as befits a new style politician in a young democracy, stuck to emollient banalities for the most part in his article. But he did say the time will come when the names of Hungary's chief writers and film-makers will be better known across Europe, writers Kurtag or Ligeti, Peter Nadas or Imre Kerkesz, film-makers Miklos Jancso or Istcan Szabo, to which he could have added Gyorgy Conrad and Miklos Harazsti, respectively novelist and political theorist and activist. Communism had its drawbacks, but it did educate people well, while preserving something of the pre-war style of life so conducive to culture in Western Europe in the first half of the twentieth century. The adhesion of this cosmopolitan, multi-lingual country to the EU can only be a large cultural gain; about that Medgyessy is quite right.

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AUTOMOBILES

Suzuki to double local production


Carmaker, Magyar Suzuki Rt, is planning to double production at its plant in Esztergom, north of Budapest, by the end of 2004, CEO Tadashi Kondo, announced recently, the Budapest Business Journal reported.
Boosting output in Hungary is a key element in the Suzuki Corp's aim to increase European sales from the current annual 250,000 to 350,000 by 2006, Kondo said. Magyar Suzuki manufactured 87,000 cars last year and sold 35,000 of them in Hungary. This year, the company plans to make 85,000 cars and export 50,000, Kondo said.
Production this year will be divided equally between three models: the Swift, which will go out of production this year, the Wagon R+, and a new model that has not yet been unveiled.
"We plan to come out with a new sporty, small family car before the summer, and are planning to make around 12,000 this year for the Hungarian market," said Tamas Tihanyi, Magyar Suzuki's marketing director. "The manufacture of Suzuki Swift models will be gradually shut down in the first six months of this year. Hopefully all new Swifts will be sold from car dealerships during the same period," he added.
The company plans to introduce a further new model by the end of 2004. The changes will lead to more workers being employed, Tihanyi said. "We plan to employ an additional 150 workers this year. It's difficult to predict the increase in the number of our employees by 2004, as new manufacturing technologies will also be introduced," he said.
Recently, Maygar Suzuki signed a contract to set up a vehicle financing company, Suzuki Financial Services Rt, with the Itochu Corporation and Merkantil Bank Rt. Merkantil Bank will hold 50% of the company, while the other two partners will own 25% each.
"The company was set up to adjust to the changes that Hungary's adoption of EU regulations will bring to the vehicle market," said Adam Kolozsvary, chairman-CEO of Merkantil Bank, a member of the OTP Group.
He added that the new firm will participate in the financing of car dealers, not only of buyers. Suzuki Financial will co-finance around 40% of the car sales financed by Merkantil Bank.
Merkantil Bank participated in financing the sale of 49,000 cars in 2002, half of which were Suzuki models, Kolozsvary said.

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AVIATION

Hungarian minister says national airline needs investor in long term


The new management and new director-general of Malev [Hungarian Airlines, national carrier] will have to reconsider the airline's business strategy, Hungarian Radio has reported quoting Finance Minister, Csaba Laszlo.
The entire board of directors and the director-general of Malev was dismissed by the agency representing the state as the owner recently. The minister said that the new management would have to review the goals to be pursued in the unfavourable international situation, and the kind of government help it would need for it. He added that in the long term Malev needed a strong investor already in the business.

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BONDS

MOL issues Ft 20bn in new bonds


Oil and gas company, MOL Rt, forged ahead with its Ft 100bn (€410m) bond auction programme recently, putting another Ft 20bn worth of one-year bonds on the block amid great investor interest, the Budapest Business Journal reported recently.
The issue was heavily oversubscribed, garnering Ft 30bn in offers for the bonds, which will have an average return of 6.72%. Some analysts link this with the fact that speculators attacked the forint in the middle of January, creating considerable liquidity in the national currency. "This was very good timing for MOL. The company took advantage of the extra liquidity," said Tamas pletser, an oil analyst at Erste Bank Investment Hungary Rt.
The forint issue is part of MOL's strategy to increase its forint liability to protect itself against unfavourable currency fluctuations. While the company's oil business is almost exclusively US dollar-denominated, its gas business is increasingly accounted in forints, Plester said.
MOL's forint liability in short-term debt rose 22% to Ft 66.2bn in 2002, according to the company's latest earnings report. At the end of 2002, MOL's debt was 38% dollar-denominated, compared to 35% in Euros and 27% in forints.
Last year MOL issued Ft 48bn worth of bonds, including a lot of short-tern discount bonds, preferred by many investors for their liquidity.
Lotfi Farbod, CEO of Deutsche Bank Rt, one of the managers of the latest deal, said one reason for the popularity of short-term notes is that invesstors have yet to come to a consensus about long-term interest rates.
The National Bank of Hungary (MNB) did an about-face when it lowered the benchmark rate from 8.5% to 6.5% in January to defend the forint against speculative attacks. Prior to the cut, the MNB steadfastly refused calls from the government and producers to slash rates in order to stop the appreciation of the forint.
MOL's issue is expected to give a boost to the stagnant local bond market, with analysts hoping that more companies will consider bonds to finance their operations.
"We hope a lot more companies come to the corporate bond market, like they do in the US or Western Europe," Farbod said. "When there is a bigger selection in the bond market, investor appetite will also be bigger."

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ENERGY

Greenergy collects US$138,000 grant for wind farm project

The US Trade and Development Agency (USTDA) announced it has given a grant, worth US$138,000, to Hungarian private concern Greenergy Kft, New Europe reported. The money will be used to partially subsidise a Phase 1 feasibility study on a wind farm project in Hungary, the US government said.
Greenergy has announced it will develop wind parks with 80-100MW of installed capacity in the country. Currently, the company is carrying out wind measures in Hungary at eight sites.
The wind farm project will help Hungary cut emissions of greenhouse gases and realise its commitment to boost its renewable energy sources. The latter is important, particularly for the country's official membership in the European Union.
The grant was awarded at a March 14th signing ceremony at the US embassy in Budapest. US Energy Secretary, Spencer Abraham, inked the grant pact on behalf of the American government and Greenergy Managing Director, Gabor Dicso, signed on behalf of the grantee.
Nancy Goodman Brinker, US ambassador in Budapest, and Gyorgy Hatvani, deputy state secretary at the Hungarian Ministry of Economics and Transport, attended the signing ceremony. 

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ENVIRONMENT

Government launches flood programme 

After one and a half years of preparation, Hungary's largest-ever flood prevention and area development programme for the Tisza region has been finally set in motion, the Budapest Business Journal reported recently.
A professional committee - which held its first meeting recently - will call an open tender in April for the planning of eight water reserves to be created along the Tisza River. Tenders will also be called for the reshaping of riverbank areas, for doing complex impact assessment in the region and for launching a communications network for the project.
Due to severe time limitations, tender winners will be required to work in close cooperation and harmonise their plans in all details, said Jozsef Varadi, head of the committee.
"What started out as predominantly a flood prevention plan over a year ago has gradually evolved into a complex ecological and agricultural programme affecting between 60 and 70 towns and villages," Varadi said.
He said that, based on the new plans, the committee will submit a detailed execution plan together with a budget proposal to the government by the end of September.
"The September deadline is a really tight one, but flooding is not a joke so we cannot afford to waste any more time," Varadi said.
In the most recent illustration of the problem, water authorities announced a flood alert along 12 sections of the Tisza.
The committee comprises representatives of the Environment and Water Ministry, the Ministry of Agriculture and Rural Development, the Prime Minister's Office, the Interior Ministry, the Cultural Heritage Ministry, and three regional development councils.
"Instead of building the dams higher and higher all the time, now we want to adopt a novel concept in flood protection by regularly letting water go behind the dams in smaller, controlled quantities," Varadi said. "We want this programme to be based on a wide consensus."
The first phase of the project, dubbed the Vasarhelyi Plan, is expected to take place between 2004 and 2008. It has a preliminary budget of more than Ft 50bn (€206m) and it proposes the construction of five water reserves, said Istvan Kertai, managing director of Viziterv Consult Kft, which drafted the plans for the Environment and Water Ministry.
The five locations would be picked from eight possible areas which experts earlier identified as spots with favourable geographical features to collect and contain water, he said.
"The advantage of the new protection system is that it would secure a regular and predictable level of water supply in the areas behind the dams, which currently ofter suffer from extreme drought in the summer and flooding in the spring, making agricultural production rather difficult," Kertai explained.
Another novel element of the new system will be to encourage the adoption of new types of land use in certain areas that have poor soil for growing traditional crops, according to Annamaria Goncz. An official of Hungary's regional development and urban planning agency, Vati Kht, she is overseeing the creation of area development plans for the areas in question.
"In each case, we would examine what kind of land use would be the most profitable in certain areas, while taking into account the protection of the area's natural heritage, such as the habitats of protected birds, rare kinds of grasses and so on," Goncz said.
She added that the switch to new kinds of land use, such as planting forests, would be facilitated by state subsidies.
In the latest version of the Vasarhelyi Plan, the terms of receiving state subsidies would also be specified, Varadi said.
While acknowledging the advantages of the complex flood protection system, many of the local agricultural producers have been vehemently opposing the construction of new water reserves in their neighbourhood.
This has already led officials to abandon plans to build a water reserve in Egyek in eastern Hungary.
"A new water reserve would take away most of the agricultural land from our village, depriving us of our major source of income," said Zoltan Bencsik, a farmer at the riverside village of Egyek. He is the head of a local association set up earlier this year by about 200 local farmers to fight for their interests.
According to Bencsik, a major problem with the plan is that a lot of people would lose their jobs due to the land loss, and there are no other job opportunities in the region. Another problem he mentioned is that the production of new types of plants the government has suggested would not support as many people as traditional crops, like wheat and corn.
The mayors of Panyola and three neighbouring villages, which would also be affected by the reserve, sent a petition to Prime Minister, peter Medgyessy, she added.
"People have several questions and worries, like what happens if contaminated water from the Tisza gets into their lands. These questions have not been answered satisfactorily," Varga said.
While emphasising the importance of local support, government officials said the new action plan should give a clear guideline as to how much veto right one village should have in a project where the reserve affects several villages.
"It would make sense to have the whole region vote on the issue, not just one village. But we need firm guidelines for such cases," Kertai said.

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FINANCIAL NEWS

Europa loan to aid SMEs

The government recently launched a new, long-term loan product aiming to facilitate the technological development of micro, small and medium-sized ventures. It is dubbed the Europa loan, the Budapest Business Journal reports.
Banks planning to take part in the distribution process expect to provide loans to the tune of Ft 300bn (€1.23bn) over the next year, executives said. "We are currently negotiating with 18 commercial banks about the terms of distributing and co-financing this loan," Boglar Laszlo, spokeswoman of the state-owned Hungarian Development Bank Rt (MFB), said recently. Currently, the MFB and Konzumbank Rt are in charge of distributing the Europa loan, while other interested banks are expected to join the club in the near future.
Konzumbank expects to receive loan applications in excess of Ft 100m during the first week of the programme, Konzumbank spokesman, Tamas Simardi, said recently. "We started to distribute the application forms for the loan recently, and have seen significant interest from companies," Simardi said.
The new product offers two types of loans. One of them, ranging from Ft 10m to Ft 150m, is available for micro, small and medium-sized ventures that have existed for at least one year. Their net annual revenue must be no more than Ft 4bn, and they should employ a maximum of 250 people.
The other category, involving loans of between Ft 150m and Ft 1.5bn, is available for large firms with at least one year's history and a solid business plan.
In both categories, loans can account for a maximum 75% of the total value of the investments they are intended to support. The duration of the loan is set at a minimum of four and a maximum of 15 years, starting with a maximum two-year grace period.
The interest rate is tied to the three month BUBOR/EURIBOR rate, with an option of a 2.5% increase, depending on the duration of the loan and the bank's evaluation of the debtor. "Banks wishing to join the scheme were pushing for a larger margin, but MFB decided to stick with the original conditions in order to make the loan affordable for more applicants," Laszlo said.
According to Laszlo, the MFB will provide approximately Ft 150bn of the programme's planned loan budget from its own resources, and expects banks to provide a similar sum via co-financing.
"The MFB will partly finance its share of the programme from issuing bonds for which the bank has an option until the end of this year," Laszlo said.
Although banks regard small and medium-sized firms as relatively high-risk clients, they see a good business opportunity in the new loan product, according to Miklos Pulai, responsible for coordinating the negotiation process at the Hungarian Banking Association.
"I am confident that the loan will start a new wave of investments, which may even surpasss the government's current expectations. But it is way too early to make any forecasts," Pulai said.

Ecostat says positive trend emerges in Hungarian economy

Pal Belyo, the director of Ecostat, a Hungarian economic research institute under the umbrella of the state statistical office, said the country's economy is following a rising trend, according to Interfax News Agency. 
Despite the war in Iraq, the trend will likely hold, he added. Ecostat increased its gross domestic product (GDP) estimate for this year to 3.9 per cent from 3.7 per cent. Next year's estimate stands at 4.2 per cent. "Even in the case of a prolonged Iraq war, depressing world economic sentiment, Hungarian growth would likely be only 0.2-0.3 percentage points lower," Belyo was quoted as saying. Inflation is expected to remain flat at 5.2 per cent. Ecostat said the government would miss by a hairline its deficit target of 4.5 per cent of GDP. The end-2003 deficit will reach 4.8 per cent of GDP, against 9.8 per cent last year. "To cut the deficit by half, very hard fiscal discipline will be necessary," Belyo said.
But even if the deficit target is not met, there shouldn't be any problem, he said. "Any deficit lower than 5 per cent of GDP will fit well with the EU accession process," Belyo said.
Although they will be higher, investments will be more sluggish this year, the research institute has said. This is due to the recent cutbacks the government has made in investment spending in order to meet its deficit target. But it believes that spending on investments could accelerate after mid-summer because economic growth will keep rising.
Gross capital formation will expand by 4.3 per cent this year, against 5.7 per cent in 2002, Ecostat predicted. Because of high consumption levels, the increase in gross capital formation could include faster growth in inventories as a result of still growing consumption, and slower growth in investment, Interfax reported. But "investment levels will increase in the private sector this year and next, due to the increased opportunities for companies after EU accession," Belyo said.

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FOREIGN INVESTMENT

Britton spends US$3.4m to gain 12% of Pannonplast

The Britton group of the United States said it has clinched a 12.01% stake, both direct and indirect, in Pannonplast, a Hungarian plastics producer, according to Interfax News Agency. 
The US group spent HUF 748.5m (US$3.37m) or HUF 1,480 per share for the share package. Britton Capital purchased 7% of the plastics maker, while a more than 5% stake was picked up by Kartonpack Rt, 92% controlled by Britton Interinvest LLC and its subsidiary Britton Capital & Consulting Kft. Under Pannonplast's articles of incorporation, no shareholder may control more than 12.5% in voting rights. Management oversees the company's strategy. Interfax said domestic plastics concern, Karsai Holding Rt, tried to push through changes in company management at the 2002 annual general shareholders' meeting after obtaining one-tenth of company control, but failed after none of the other shareholders supported its proposals. Pannonplast's shareholding structure (companies that control more than 5% stakes) include Karsai with 10.01%, EEDF Investments 6.46%, Swiss Pictet & CIE AG 2.71%.

US companies mulling investments in energy

The US Ambassador in Budapest, Nancy Goodman Brinker, said American energy companies are mulling investments of millions of US dollars in Hungary from now until 2005, Interfax News Agency reported. The plans are dependent on a number of regulatory concerns, the ambassador said in a speech at the American Chamber of Commerce. "The affected areas include electricity generation, electricity trading and natural gas development," Goodman Brinker said. 
Scott Bozek, the US embassy's commercial counsellor, said the biggest investments would be for natural gas development. Investors would guarantee that new regulations offer a basis of returns on their investments. This could result from securing terms for access to the gas distribution grid and permitting gas to be sold to multiple buyers, at world market prices.

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FOREIGN LOANS

EIB to provide key funding for SMEs in Hungary

HVB Hungary Rt will work together with the European Commission and the European Investment Bank (EIB) to boost small- and medium-sized enterprises in the country, New Europe reported recently. The plan is in line with the SME Finance Facility, promoted by the EC under the PHARE Programme, the EIB said.
Concerning the tripartite cooperation, EIB Vice President, Wolfgang Roth, said: "The EIB is lending to domestic and foreign direct investors alike in Hungary. Cooperation with an experienced partner such as HVB Hungary should help start off many deals with positive long-term effects in terms of international competitiveness and EU-integration of the Hungarian industry. The participation of the European Commission in the new scheme also helps create a favourable environment for the development of a solid SME sector in the new EU members. 

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