% of GDP
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
Update No: 078 - (27/10/03)
Cohesive, but cosmopolitan
The Hungarians feel bitter about the Treaty of Trianon in 1919, the companion treaty to the Treaty of Versailles of the same year, when they lost nearly one half of their territory and somewhat less of their population. The vast Transylvanian mountain plateau, for instance, was sparsely populated. There are under two million Hungarians today in Romania. Slovakia and the former Yugoslavia are the abodes of Hungarians to this day.
The result of this truncation was not so unfortunate as all that. Hungary has been left a small, but cohesive nation of homogenous stock. There are some Gypsies and others, but well under 10% of the population.
The lure of Budapest
Yet Budapest is the most cosmopolitan city and capital in Central Europe. This is largely the legacy of having been one of the twin capitals of the Austro-Hungarian Empire, the livelier and more light-hearted one. Visitors from across the former empire and well beyond throng its streets and squares, its cafes and restaurants, its baths and boutiques.
Naturally this is the place where many a multinational firm has set up shop. Hungary has more than US$22bn in FDI and most of it is in or around Buda or Pest., either side of the Danube.
In the old days of the communists the Hungarians did better than other Socialist countries with a market variant of the system, or goulash communism. It also did comparatively well under reformers in the 1990s, although one must remember from such a low base at the end of goulash communism that even today GDP per capita barely exceeds US$5.000.
Economy in crisis.
Today everything has changed. The process was started off in late June. A massive currency crisis broke out in July.
The Hungarian forint had been one of the most stable currencies in the region. But the Hungarian Central Bank was then forced to make a devaluation, A modest change in the mid-point forint trading band, intended as a re-assurance to exporters that there would be no excessive appreciation, precipitated a plunge in the currency instead. Currency dealers across Central Europe began to sell forints heavily and a financial crisis had emerged.
Perhaps just what was needed?
The curious thing about devaluations is that they are greeted as disasters at the time, but often turn out to be highly beneficial. One only has to think of the UK's ejection from the ERM on Black Wednesday, September15th 1992. This led to a sharp devaluation and an export-led recovery, which did not lead to electoral success, but to a wipe-out of Major's government in 1997, because it had so bitterly fought to retain the pound inside the ERM at too high a rate. The collapse of the rouble in 1998 is another instance, leading to spectacular Russian growth ever since, admittedly at the price of the devastation of the middle class and a social polarization subsequently.
This last example shows that one can have too much of a good thing in the way of devaluation. The Prime Minister, Peter Medgyessy, has made a powerful case recently that the summer devaluation could yet turn out well. At a September business round-up he pointed out that growth in 2000-2002 was led by consumption. The forint was overvalued, worsening the position of exporters. That this is not just a retrospective justification is shown by the fact that the government deliberately engineered a devaluation in June, which then got out of hand in July. Given the notorious volatility of financial markets, these sorts of operations often do. The forint is at a realistic rate today, the premier insisted, with high interest rates, the inevitable consequence of the crisis, due to fall.
Time will tell if the premier is right. There will be an election, probably in 2006, and his Socialist Party's chances depend on whether he is. The opposition party, Fidesz, led by former premier, Victor Orban put up a very good performance in the last elections, almost hanging on to power, an unheard-of thing in the post-communist world. At the moment the economy is in trouble and the ruling party is naturally getting the blame. But there is still plenty of time for Medgyessy to be vindicated.
One thing the former communist government is doing is to steal the opposition's Thatcherite clothes. The budget deficit, the highest in Europe, is 9% of GDP. It is to be brought down by spending cuts. But these are to be accompanied by a reduction in corporate tax from 16% to 14%. Hardly typical communist medicine. Much will depend on circumstances nearer the time of course, such as whether general EU growth has picked up by then. It is still far too early to write off the Social Democrats.
Hungarian minister outlines EU, government farming subsidies for 2004
The year 2004 is going to be the change of an era in agriculture, and the budget will be adjusted to this, Minister Imre Nemeth, has said. He also announced that in order to support the small farmers, school milk dispensation will be reintroduced next year.
Gabor Bankuti of Kossuth Radio reported on the government briefing: Next year Hungarian agriculture will be given more support, the minister said. This will not only be 58bn forints more than last year, but it will also exceed the sum by 36bn forints prescribed by the law on agricultural development. Agriculture and rural development can expect subsidies worth 293bn forints, out of which 157bn forints will come from the Hungarian and 136bn from the EU budget. As regards the latter, two-thirds of this is automatic and only one-third which has to be applied for through tenders.
The picture is clearer if it is broken down into subsidy by hectares. Instead of the 7-9,000 forints subsidy per hectare this year, 35,000 forints subsidy will be dispensed next year, that is a four-fold increase. Besides this, there will be considerable support from the national development plan for rural development.
Nemeth said: "Besides a change of an era in agriculture, 2004 will also mean reconstruction. As of 1st May 2004 Hungary cannot protect its market by various customs duties from the goods arriving from the EU and the member states also cannot defend themselves against Hungarian products this way either. I consider it extremely important that the trust of Hungarian customers toward Hungarian agricultural product should be preserved. Therefore we shall considerably improve conditions of food safety."
According to the opposition Fidesz [Hungarian Civic Alliance], next year's agricultural budget will not be enough for the successful preparation of the Hungarian agriculture for EU entry. Bela Glattfelder told the radio that "if we deduct the sum which we get from the EU, it transpires that the government is earmarking smaller sum for agriculture next year than this year." The opposition politician said that extra 60-70bn forints is needed in order that Hungarian agriculture should not be a loser in the first year of EU accession.
Audi's Gyor plant boosts engine development activities
Audi Hungaria will be significantly stepping up its engine development activities at Gyor (northern Hungary), Audi board Chairman, Martin Winterkorn, announced recently, Interfax News Agency reported.
Audi Hungaria is the principal engine supplier of the Audi Group and a fully owned subsidiary of Audi. The company has been Hungary's leading exporter for many years, and is one of the country's highest-revenue enterprises. Since the start of production in 1994, a total of more than 7.4m engines and 259,000 of the Audi TT and Audi A3 vehicles have been assembled in Gyor. Total investment was 1.6bn since the establishment of the company. Development activities of the Hungarian engineers focus on the series production operations at Gyor. There will be around 100 Hungarian development engineers and designers working on behalf of the entire Group by mid-2004.
Malev strategy earns bleak appraisal
Market observers said recently they are unimpressed by a new strategy national air carrier, Malev Rt, has worked out. The strategy seeks to respond to the challenges of Hungary's impending EU membership and the appearance of budget airlines on the local market, the Budapest Business Journal reported.
A final decision on the strategy will be made by the airline's owner, the State Privatisation and Holding Rt (APV), in the near future, Malev spokesman, Adrien Krebsz said. At the same time, the company is continuously holding talks on joining the SkyTeam global airline alliance, she added.
Elements of the new strategy include the termination of business class services; reducing prices and level of services; selling the company's two Boeing 767 aircraft serving New York and Toronto; using the flights of other airline companies on certain routes; cutting jobs; and not exercising an option for six Bombardier CRJ-200ER aircraft valid until 2006.
"The aim of the new strategy is to reach a significant improvement in the company's results in the short term, and to create a permanently successful, self-sustaining operation in the longer term, Krebsz said.
However, some airline experts warned that the strategy does not seem viable, and has come too late.
"I'm pessimistic about Malev. In other words, I think the company is hopeless now and the new strategy is the last nail in its coffin," a strategic consultant close to the airline industry said. "The efforts will create a high-cost, low-fare company, as it has very high fixed costs whatever prices it offers."
The consultant was dismissive of what he saw as Malev's aim to position itself somewhere between a discount airline and a network carrier.
"That is nonsense, as there is no such thing in the world. It will result in a product that does not meet the demands of any passenger segment," he observed. "When the market is fully liberalised in May, and low-cost airlines come, they will extend the market by 60% and take over 30% of Malev's turnover. That is enough to make the company bankrupt."
The head of the local operation of another airline shared some of the consultant's concerns saying Malev could make more returns from keeping its top clients.
"The most interesting change in the new strategy is that it gets rid of the business class, despite the fact that turnover is significant in that segment," said the airline executive, who requested anonymity. "In addition, tickets for business-class passengers are usually paid for by their companies, so while the passenger does not care too much about the price, the quality of services is crucial."
The executive added that the revenues of Malev are at a sufficient level, so it should aim to reduce costs instead.
Industry insiders agreed that finding a strategic partner might have improved Malev's situation, but added that they believe it is too late now to find one under favourable conditions.
"The best thing Malev could do at the moment is to shut down and start everything again with a new fleet, new lease agreements, new staff and a strategic partnership," the strategic consultant said. "Joining an alliance could have been a solution for the company's problems, but all of the opportunities were missed in the company's history, and it's too late now to find another one."
Even so, the executive did not see Malev's situation as entirely hopeless, noting that there have been examples in the EU where member states have managed to find a way to support their national carriers. Malev has a code-sharing agreement with KLM Royal Dutch Airlines NV to sell seats on each other's flights on some routes.
When appointing the new management and board to Malev in May, Miklos Kamaras, CEO of the APV, which owns 97% of Malev, said the government plans to secure conditions for the airline'' long-term operations and to preserve Malev as a national airline. While the government is committed to selling Malev, the current situation in the industry is not favourable for privatisation, and the government's means of upgrading the company are limited, he added.
Malev's losses amounted to Ft2.78bn (10.9m) in 2002, following losses of Ft4.7bn in 2001.
Luxair, SkyEurope to add Budapest to flight networks
Two European airlines, Luzair and SkyEurope Airlines, have decided to enter the Hungarian market the Budapest Business Journal reported. Luxembourg's airline Luxair will begin a daily operation between Luxembourg and Budapest.
"Uniting history, culture and modern dynamism, Budapest has evolved into an international metropolis. Especially as Hungary will be joining the European Union in the near future, this will be a fast and convenient connection for business people and politicians," the company said,
The flights will be operated using Luxair's Embraer 145 Eurojet aircraft, departing Monday to Friday at 4.05pm from Budapest, and at 1.45pm from Luxembourg. The company will offer introductory return fares from 199.
Established in 1948, Luxair operates flights to 24 European destinations. Major partners of the company are Lufthansa, Austrian Airlines, Air France and VLM airlines.
Slovak-based budget airline SkyEurope will start regular flights from Budapest to London, Paris and Milan in November, offering one-way tickets from Ft5,990 (23), excluding tax. Average ticket prices of the company are 30% lower than tickets sold by traditional airlines.
According to the company's PR Manager Stanislav Saling, the company will launch its daily flights to London and Paris on November 14th, and to Munich and Milan on December 15th. The company will operate Boeing 737 and Embraer 120 aircraft on the routes.
With bases in Bratislava and Kosice, in eastern Slovakia, SkyEurope operates regular flights to Prague, Berlin, Munich, Stuttgart, Zurich and Milan, as well as to three Croatian destinations, Dubrovnik, Split and Zadar. It started its first flight in February 2002 and has carried more than 120,000 passengers since then. The airline started flights from Bratislava to London and Paris this summer.
Tender ahead in PPP pilot project
The Justice Ministry is expected to call a tender for a prison project to be built in the framework of a public-private partnership (PPP) scheme by the year's end, ministry officials said recently, the Budapest Business Journal reported.
This will be the first in a series of pilot PPP projects various ministries are preparing. These projects, in turn are expected to pave the way for further PPP projects in all sectors of public administration by establishing legal, financial and technical standards, according to Peter Karakas, head of the PPP office within the Economy and Transport Ministry.
"We are preparing guidelines for ministries preparing PPP projects. These will detail the risk factors, legal problems and other issues related to PPP investments," Karakas said.
The PPP office functions as a coordination arm of the PPP committee, which was formed in May. Members of the committee include representatives of the economy, finance and justice ministries, the Prime Minister's Office and the Central Statistics Office (KSH). No private firms are represented.
The Justice Ministry's planned project stipulates the construction of a prison able to hold 700 inmates.
"We intend to call a tender for the construction and operation of the prison, including most services. The ministry would retain the task of guarding and directing the facility," said Ferenc Tari, a ministry official. The cost of the project is estimated at Ft10bn (39m). Its location has not yet been determined, Tari said. "Providing a plot may be part of the tender. This is still to be decided," he added.
The project plans and planned tender documentation will have to go to the PPP committee this autumn. If the committee supports the plans, the project will go before Parliament's Economic Committee for approval.
Another project, involving construction of a student dormitory, is also at an advanced phase at the Education Ministry, according to Karakas.
"The prison and dormitory projects have already been discussed once by the PPP committee, which requested some clarifications," he said.
For example, he explained, the committee requested ministries to provide more financial figures justifying the advantages of public-private schemes. In the long run, the Education Ministry would like to build several dormitories with a total capacity of 10,000 students. It also envisages PPP projects to renovate and extend nine university facilities for a total of Ft55bn.
According to plans of the PPP committee, projects with a value between Ft10bn and Ft50bn must be approved by the government, while those exceeding Ft50bn need parliamentary approval.
According to Karakas, the Economy Ministry's future PPP plans include road construction projects.
"We plan to call a public procurement tender for financial and legal advice this autumn. In the best-case scenario, tenders for the realisation of the projects will be called next spring.
Hungarian oil company finds new gas field in eastern region
Mol Rt [Hungarian oil and gas company, partly in state ownership] has found 4bn cubic metres of gas at Hosszupalyi and Monostorpalyi in Hajdu-Bihar county [in eastern Hungary]. This amounts to more than 10 per cent of Mol's gas reserves. Extraction is expected to start next year, Hungarian TV2 satellite service has reported.
Next year, the daily amount of gas to be extracted from this well, which is still chained, is 1m cubic metres. The annual number of prospecting sites located by the national oil company is 10 to 12, but they find something only at two or three places.
Imre Szilagyi, head of prospecting, said: "For example, according to preliminary estimates, the stock of the gas field at Hosszupalyi reaches 4bn cubic metres, which amounts to more than 10 per cent of Mol's gas assets."
In the past years, the oil company's researchers have found their target in several places. They found oil in Toalmas, Nagykata [in central Hungary] and Szentmihalytelek [southeastern Hungary] and natural gas in Borota [in southern Hungary].
MOL stake to sell on bourse
The government wants to sell a 13% stake in oil and gas company MOL Rt this year through the Budapest Stock Exchange Rt (BET) or a foreign bourse, CEO, Zsolt Hernadi, told newswire MTI recently, the Budapest Business Journal reported.
The stake is worth about US$329m, based on the stock's current market price. The choice to use a stock exchange to sell shares in MOL - in which, according to its articles of incorporation, no investor can buy more than 10% - is wise, according to Tamas Simonyi, corporate finance partner of KPMG Hungaria Kft.
He explained that selling even a 10% package of shares in MOL to an industry investor would endow that investor with an undesirable amount of influence in the company.
"10% is a strategic share in the case of a company with MOL's shareholder structure. It would be groundless to sell a 10% share in a package to one investor, as MOL gets on well on its own," Simonyi said.
Hernadi confirmed that the 10% limit renders it unlikely that an industry investor would buy a stake, and added that this limit is expected to remain in force for five years after Hungary joins the EU. He said any investor can buy MOL shares.
MOL is expected to achieve sufficient growth by following its own strategy and does not need help form a professional investor, Hernadi asserted. This was decided back in 1996, when MOL was first privatised, he added.
The government in June revealed plans to sell its 23% holding in MOL in stages.
EU subsidies will boost Hungary's investment projects next year
Hungarian investments worth more than 280bn forints could be realized next year from EU resources, and combined with the Hungarian partner's contribution, Kossuth Radio has reported.
This is 61 per cent more than this year it was stated in the out-of-turn briefing of the government spokesman. It also transpires from the document that next year's budget will guarantee the funds necessary for making use of Union subsidies, about 110bn
FOREIGN ECONOMIC RELATIONS
UK -owned engineering company looks forward to more contracts
Beck & Pollitzer Hungary Kft, the local affiliate of British engineering firm Beck & Pollitzer Engineering Ltd, expects a boom in outsourced engineering assignments next year, Abdelgadir Ahmed, the company's country managing director, said recently, the Budapest Business Journal reported.
"We expect to handle at least ten large assignments next year," Abdelgadir said. Negotiations are under way about launching the second phase of production development for several clients we have already served. We also hope to manage one large assignment - worth around Ft100m (390,000) - and a couple of smaller assignments from new clients in 2004."
The company recently finished its most recent project - the installation of Samsung's flat screen factory in Göd , near Budapest.
Beck & Pollitzer Hungary offers outsourced engineering services, managing the installation and relocation of manufacturing and production line, Ahmed said. It also provides control systems services and on-site maintenance.
The company was established last October by upgrading the local branch office of the British firm into a separate legal entity.
Ahmed said most of the company's clients are suppliers that offer services to large manufacturing groups on a build-supply-maintain-deliver basis.
"For example, we were commissioned to handle the Samsung project by Hirata, Samsung's contracting company," he said.
Recalling another similar project, Ahmed said Beck & Pollitzer recently completed the installation of machinery at the Komarom plant of Japanese-owned mobile keypad maker, Sunarrow, a major supplier to Finland's Nokia Corp.
Since opening its Hungarian branch office in April 2001, Beck & Pollitzer has relocated and installed the production facilities of several large foreign companies, such as German copper fittings maker, Woeste Yorkshire GmbH, and Japanese auto part manufacturers, Denso Corp, Diamond Electric Co, Toyo Seat Co and Stanley Works, Ahmed added. Other clients he mentioned include US-based die castings producer Gibbs Die Casting.
The company usually works with a team of 30 specialists who are summoned for each project separately.
"Outsourced engineering is a typical example of conventional outsourcing, which aims to offer specialist assistance as subcontractor in non-core activities in order to help cut costs and let companies focus on their core business," Ahmed explained.
Beck & Pollitzer posted total turnover of Ft33m during its two and a half months of operations in 2002, and expects net revenues in excess of Ft150m in 2003. Abdelgadir forecast that next year's revenues will be over Ft200m.
Both locally and globally, Beck & Pollitzer targets companies in the automotive, printing, food processing and electronics industries with its services. Currently, more than half of the group's total UK revenue - which amounted to £44m last year - is generated by commissions from the automotive and printing industries.
Beck & Pollitzer also runs offices in France, Germany, Poland and the Czech Republic. It is exploring the possibility of opening affiliate offices in Slovakia and Romania, according to Ahmed.
Tesco seeks out dominance in Hungarian market
Tesco Global Aruhazak Rt (Tesco), the subsidiary of Britain's Tesco Plc, has pledged to become Hungary's biggest retail chain, reports New Europe. The ambition was announced during the recently held Tesco first Supplier Business Conference, at the Convention Centre in Budapest. "Our strategy is to expand rapidly and become the strongest player in the markets we operate in," Tesco CEO, Paul Kennedy, said in his address to conference participants.
According to poll research group GfK Hungaria, Tesco in Hungary had a market share of 13% last year; this is expected to grow to 15% in the near future. Commercial Director of Tesco, Paul House, said that the company's main target was to provide the cheapest prices goods. "Many products are cheaper now than they were in 2001," he said noting that plans for more reductions were imminent.
Tesco started in Hungary in 1994 and now has 22 supermarkets and 29 hypermarkets, with another four due to open before the end of this year and nine more in 2004. "We will continue to develop with nine hypermarkets a year," Kennedy vowed, adding that the chain will also develop smaller formats so as to increase coverage to more towns as part of Tesco's endeavour to become Hungary's largest retailer.
According to data revealed by Tesco executives, the chain serves at least 1.5m customers each week while their hypermarkets offer between 35,000 and 55,000 products. Estimates for this year's sales were put at around US$248m from Tesco's own brands.
"Primarily Tesco has three main objectives, to attract new customers, increase customer spending and retain customer loyalty," House said.
House explained that phase-one of Tesco's distribution centre in Herceghalom, currently distributes 50% of the chain's total grocery volume or one million cases a week.
In phase-two, due to open in March 2004, Tesco is extending the existing facility, and will centralise 80% of its grocery volume or 2.3m cases per week. The facility will employ 800 staff.
Ex-Vivendi renamed Invitel
While announcing Invitel Telecommunications Services Rt as its new name as of September 18th, executives at the former Vivendi Telecom Hungary Rt recently affirmed the company's ambition to consolidate its position in an ever more competitive market, the Budapest Business Journal has reported.
"We have a new approach going forward, and the two values of focus and commitment to customers all over the country," Dave A Riffelmacher, who took over as the firm's CEO on September 1st, said at a press briefing.
The company is Hungary's second largest fixed-line telecom, with 2002 revenues of 176m.
Ian McKenzie, formerly interim CEO and now chairman of the company, said at the conference that he had expected to return to his native UK after handing over the CEO's reins. However, he said he now relishes the prospect of staying with Invitel for the long term as it competes further on the market.
Servicing existing subscribers will remain a key focus for Invitel, while it will also pursue new customers, especially in the business sector, the company affirmed in a press statement.
"We will simultaneously make all endeavours to take the lead in telecommunications and wish to prove our commitment to competition in this industry," said the statement.
Earlier in the year, the former owner, French media giant Vivendi Universal, sold the company to financial investors AIG Emerging Europe Infrastructure Fund (EEIF) and GMT Communications Partners Ltd for 325m. Both investors hold 50% stakes in Invitel.
"The sale provided the opportunity to introduce a new name. The change also replaces the old sub-brands - thus the names V-fon, V-net and V-com will also disappear," said the company's statement.
The new ownership structure enables Invitel to continue its business activities with a strong capital base, the company statement said.
Invitel will continue to make all efforts to provide state-of-the-art voice and data services, the statement said. Its service portfolio will be suited to the needs of customers, using all available technological innovations, it continued.
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