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HUNGARY


 

 
Key Economic Data 
 
  2002 2001 2000 Ranking(2002)
GDP
Millions of US $ 65,843 51,900 46,600 45
         
GNI per capita
 US $ 5,280 4,830 4,710 69
Ranking is given out of 208 nations - (data from the World Bank)

REPUBLICAN REFERENCE

Area (sq.km)
93,200

Population 
10,106,017

Capital 
Budapest

Currency 
Forint 

President 
Ferenc Madl

Private sector 
% of GDP
 
60%

  

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: 077 - (01/10/03)

Summer crisis
The situation in Hungary is changing dramatically, both economically and politically. The process was started off in late June. 
Hitherto the forint, the Hungarian currency, had been one of the most stable currencies in the region. But the Hungarian Central Bank was then forced to make a modest 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. 
The Prime Minister, Peter Medgyessy, proceeded in July to commit Hungary to joining the Euroland on January 1st 2008. There will be an election before then, however, probably in 2006,.and his Socialist Party is very likely to lose to the opposition party, Fidesz, led by former premier, Victor Orban, which put up a very good performance in the last elections, almost hanging on to power, an unheard of thing in the post-communist world. The economy is in trouble and the ruling party is naturally getting the blame.

Political developments
Medgyessy admitted on August 21st to a meeting of the top leadership of his Social Democratic Party that he had made bad political mistakes this summer. In particular he and other top leaders had publicly implied that agreement had been reached with the Free Democrats, their main coalition partner, that certain changes in taxation would be undertaken. This was not so and created unnecessary tension.
The government has since back-pedalled and engaged in talks with its two coalition partners on how to implement the planned income tax cuts. But, as we shall see, tax cuts of any type are going to be difficult to introduce in the likely climate ahead, without alienating the financial markets and risking a repetition of the summer's currency crisis..
Orban has been much more adept in handling his own allies, the Christian Democrats, signing an agreement between the two parties to concert policy on August 22nd. Fidesz consented in the agreement to increase its reliance on Christian Democratic experts in the fields of church policy, social care and family policies. There is no doubt who is the more astute politician.
But the election is going to be decided by economic issues. Here things are also likely to go against the ruling coalition, not just in the short term, but the long term as well.

Economic prospects
The three large economies of the region, those of the three main Visegrad powers, Poland, the Czech Republic and Hungary, are suffering from a painful combination of slower economic growth, rising budget deficits and, most seriously of all, a decline in interest by foreign investors. The last development is readily understandable because of the continental-wide slowdown in the EU. Now is not the time to buy in the Visegrad countries, nor to invest there, however promising their long-term prospects remain.
But the countries concerned, and notably Hungary, have aggravated the situation by raising wages and going on a spending spree, lashing out on huge public works, highways, bridges and the like, when less money has been available domestically and less has been coming in from abroad. In the longer run the public works are a very good idea that can only increase the appeal of Hungary to all investors, Hungarian or foreign. But at the moment even the Hungarian capitalists are seeking foreign pastures. More is flowing out of the country than is going in, according to the central bank.
The worrying statistic for the Hungarians, which has led Fitch's to downgrade its outlook on the country to "negative," is that the budget deficit is 9% of GDP. This is the first step to downgrading its credit-rating for Hungary altogether.
The key is the combination of the budget deficit, the highest in Europe, and the devaluation of the forint, which has started jitters throughout the zone. Charles Robinson, an economist who specialises in Central Europe in ING in London, said that the sell-off of Hungary's currency was a warning by the market to the government: "If you don't sort out your budget, and you go for the Euro in 2008, you ain't seen nothing yet." Hence the problem of the tax cuts.
The economy has its pluses all the same. With over $20billion in FDI, this means there is $2,000 per capita of foreign direct investment in the country, a high figure for any country in the world and the highest in the former communist world (with the possible exception of Poland). But unless the macro-economics are sorted out soon, there might not be much more of this prime stimulus to the micro-economy coming in.

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AUTOMOBILES

Ikarus bus plant to close in Székesfehérvár

The Ikarus bus factory in Székesfehérvár will close, a recent announcement said, followed by a renewed bid by its minority owner to buy out and rescue the operation, the Budapest Business Journal reported recently.
The operator of the plant, Ikarusbus RT, explained the closure by saying that sales have significantly dropped since its sale in 1999 to Irisbus, the bus-making unit of Italy's Iveco.
According to an Ikarusbus press release, in 2002 the company sold 281 buses, down from 684 in 2001, while the expected figure for 2003 was under 200. The company blamed a decline in sales on both the domestic and traditional export markets, particularly Russia.
Local transportation companies in Hungary are not in a position to invest in renewing their fleets, the release explained. The company has received only one major export order for this year, involving 100 bus frames, it added.
Part of the production of the Székesfehérvár plant will be transferred to Ikarusbus' other factory, the Budapest-based Ikarus Custom-Made Bus Kft.
Ikarusbus said it will produce frames and buses at its Budapest plant. It added that it will attempt to strengthen its Hungarian market position, selling city and long-distance buses produced elsewhere by Irisbus.
Meanwhile, Ikarus Rt, which holds the 25% of Ikarusbus not owned by Irisbus, recently reiterated its December 2002 buyout offer.
Ikarus Rt Chairman, Gábor Széles said he is confident that with proper marketing and investments to upgrade Ikarusbus' production machinery and renovate its properties, the operation can be turned around. Ikarus Rt aims to re-establish Ikarusbus' domestic and international market positions and maintain production in Székesfehérvár.
Ikarusbus generates annual losses of over Ft 3bn (€11.6m) and its accumulated debt amounted to Ft 19bn by the end of 2001.
The closure of the Székesfehérvár plant will cost 187 people their jobs, following 270 redundancies at the factory in April this year.
According to József Zimmermann, president of the local employment office, although this is only a small addition to the 13,986 unemployed currently in the Székesfehérvár area, these new job-seekers will pose a specific challenge.
"We think that these 187 employees are from older age groups, with specialised knowledge and relatively high salaries," he explained.

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BONDS

Eurobond proceeds used to refinance


The Government Debt Management Agency (AKK) has mandated Morgan Stanley and UBS Investment Bank to lead manage a one billion Europe seven-year Eurobond issue for Hungary, according to Interfax News Agency reports.
The launch and the price of the bond is expected in the second half of September. The proceeds will be used to refinance public debt maturing in 2003 and in early 2004. The last Hungarian Eurobonds, issued at the end of January, was also for one billion Euro for ten years, is coupon 4.50 per cent.
Hungary's sovereign rating is A- at Fitch, A- at Standard and Poor's and A1 at Moody's.

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ENERGY

Slovenia, Hungary sign contract to build power line


The chairmen of the Slovene and Hungarian electricity grid operators on 9th September signed an agreement to build a 400-kV power line between both countries. This will be Slovenia's first electric main with the neighbouring country, and an important international line envisaged in the draft national energy scheme, STA News Agency reported, quoting the Slovene power company ELES.
The agreement was signed in Hungary's Heviz by chairman of ELES Vekoslav Korosec and chairman of Magyar Villamos Muvek [Hungarian power company] Laszlo Pal.
The long-distance line is expected to be a major factor in upgrading the reliability of the national electricity grid and the quality of transmission in the southeastern part of the country. Moreover, ELES believes that Slovene suppliers will have access to low cost power from East European electricity markets.
The agreement signed stipulates the obligations of investors and lists the basic technical features of the power line and the appertaining high-voltage facilities, while operating regulations will be defined once the power line has been built.
Hungary has already built its part of the line, while Slovenia still needs to construct some 80 km of this 400-kV power line, complete with optical cables. The power line is expected to be completed by the end of 2007.

Serb fiasco seen as likely end to MOL's regional expansion programme

With its failure to win a tender to buy a controlling stake in Serbia's Beopetrol a.b. at the end of August, analysts say Hungarian oil and gas company MOL Rt's dynamic in Eastern Europe has come to a halt, Budapest Business Journal has reported.
"Compared to firms like LUKoil, MOL and its Austrian rival OMV AG are a little too small to have aggressive aspirations to further consolidate the industry," said Toomas Reisenbuk, head of investment at Trigon central and Eastern European Fund.
The €15m Tallinn-based fund was launched last April, and so far has invested approximately 20% of its capital in Hungary, with MOL stocks accounting for about 7% of its entire portfolio.
"The next big privatisation deal in the region will be Romania's Petrom, but MOL is unlikely to submit a bid on its own due to the high purchase price of the firm and the subsequent obligation to carry out a capital increase, which together may amount to US$1.5bn," said Tamás Pletser, an analyst at Erste Bank Investment Rt. 
LUKoil, Russia's second largest oil producer, outbid MOL by offering €207m for 79.5% of Beopetrol, Serbia's second largest fuel retailer. The Serbian side now has one month to conclude exclusive talks with LUKoil.
According to a recent MOL statement, the firm intends to seek alternative ways to secure a presence in Serbia. According to Pletser, one way would be to build a network of filling stations as a Greenfield investment. Another alternative would be trying to get a stake in Naftna Industrija Sribje (NIS), another Serbian oil and gas firm, expected to be privatised later.
MOL's €190m bid for Beopetrol was the most recent step in the company's long-tem expansion programme in Eastern Europe. According to information from MOL, the company has spent more than US$1.1bn in the past three years buying refineries in Slovakia and Croatia and gas stations in Romania. The latest acquisition was the purchase of a 25% stake in Croatia's INA for US$505m.

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EU ACCESSION

Hungary to receive EU funds next year


Hungary will be a net recipient of European Union funds in 2004, to the tune of HUF 64 billion (251 million Euro), the finance ministry said in a statement, cited by Interfax News Agency. The ministry was responding to charges by Mihaly Varga, former finance minister from the opposition Fidesz party, who said at a press conference that Hungary could end up a net contributor to the EU budget in 2004, as funds actually transferred by the EU may not match the HUF 149 billion that Fidesz understand Hungary is required to pay into the EU budget. 
The ministry statement notes that Hungary's payment requirements as well as available financial benefits include items that are not part of the EU budget, such as direct agricultural payments. Taking these into consideration, Hungary will receive HUF 344.8 billion from the EU in 20-04, and contribute HUF 280.8 billion, according to the ministry.

Hungary to decide on EU agricultural payments

Hungarian Minister of Agriculture and Rural Development, Imre Nemeth, stated that Hungary is expected to decide by early September whether to choose the standard or the simplified system for the direct agricultural payments it will receive from the European Union. 
Under the standard method, farmers can receive the direct payments only on the basis of the farming quotas and on the types of plants and animals as set in the Accession Agreement. The standard system also requires farmers cultivating 19 hectares or more to leave 10 per cent of their land fallow in order to remain eligible for assistance. 
Under the simplified system, funding is based on the entire area of arable land, grazing land or gardens in Hungary. Thus, more farmers will receive funding, but the amount of the funding will be smaller per hectare. Choosing the simplified method would increase the total area for which funding is dispersed from 3.5m hectares stipulated in the Accession Agreement for crops, including oil seeds, high-protein grains and fibre crops to 5.8m hectares. However, the simplified system requires the elimination of direct subsidies for farm animals in 2004, and for dairy products in 2005.

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FINANCIAL NEWS

Hungary's GDP rise 2.4 cent in second quarter of 2003, lower than expected


In the second quarter of the year, the gross domestic product [GDP] was 2.4 per cent higher than a year before, Kossuth Radio has reported. According to data published by the Central Statistical Office [KSH], economic growth was 2.7 per cent in the first quarter. Analysts expected 2.9 per cent GDP growth rate for the second half. According to KSH, the last time economic growth rate was below this level was in the first quarter of 1997. At that time, GDP increased by 2.3 per cent.

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FOREIGN LOANS

Hungarian state-owned bank gets international loan


The Hungarian Eximbank will receive a loan of 230m Euros in total from a consortium of 19 banks from nine countries. Edit Szentgali of Kossuth Radio reported on the details of a contract signed on 2nd September. 
Szentgali said that the Hungarian Export-Import Bank Rt is a state-owned bank which has the task of granting loans or guarantees to businesses to help Hungarian exports. 
Eximbank director-general, Frigyes Banki, said that the amount of loans granted by the bank was 35 per cent higher than last year, as planned, and it was rising rapidly, this is why it was necessary for Eximbank to turn to the market for loans. It has succeeded, so much so that international banks offered more than the originally asked 200m Euros. Therefore, Eximbank eventually will get 230m Euros of loans, covered by a guarantee by the Hungarian state. Eximbank will spend the extra resources for pre-financing Hungarian exports, buyer's loans and guarantees.

EIB to lend 360m Euro for infrastructure development

Finance Minister, Laszlo Czaba, and European Investment bank (EIB) Chairman, Philippe Maystadt, signed an agreement that will allow the EIB to lend Hungary €360m for infrastructure development.
Of this sum, €170m will help finance the government's 230m Euro railway renovation project, to be completed by 2006. This amount will be used to upgrade stations and junctions at Radospalota-Ujpest, Szekesfehervar and Erd. The Gyor-Celldomolk railway line will be electrified and part of the Budapest-Esztergome track will be upgraded. The remaining €190 of the EIB loan will go towards the government's €250m project to build 52.5km of roadway by 2007.

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NUCLEAR ENERGY

Paks clean-up commissioned, payer remains unclear

Directors of Paks Nuclear Power Plant recently picked Russian company TVEL to clean up after damage at No 2 reactor, though no agreement has been reached over who should pick up the roughly Ft 1bn (€3.883m) bill, reports the Budapest Business Journal.
The incident occurred on April 10th during the cleaning of fuel rods. Radioactive gas subsequently appeared in the air when a cleaning container designed and operated by German-French Framatome-ANP GmbH was opened.
"The management is still negotiating with Framatome about cost sharing. If they cannot reach an agreement in the foreseeable future, the case will be taken to international court," István Mittler, deputy head of the plant operator's press department said.
According to a detailed report by a team of experts from the International Atomic Energy Agency (IAEA), the cause of the accident was a planning mistake by Framatome.
The report adds that Paks Nuclear Power Plant Rt delegated too much responsibility to Framatome. It also says that the Hungarian Atomic Energy Office, which authorised the cleaning device, did not carry out a thorough risk analysis, and failed to employ some of the IAEA's recommendations concerning the risk assessment of devices used at nuclear facilities.
Kurt Fischer, head of Framatome's team delegated to Paks, confirmed that talks are ongoing regarding the financing of the clean-up.
"We accept the IAEA report, and we are negotiating with the Paks management about financing the rehabilitation costs," Fischer said.
Besides TVEL, Framatome itself submitted a bid in the rehabilitation tender. According to the Paks management, the Russian bid was adjudged more favourable in terms of professional references, deadlines and costs.
Paks might not get as much compensation from Framatome as it would like, according to Attila Aszódi, ministerial commissioner responsible for what happened.
He also pointed out that the present contract is only the first part of the rehabilitation work needed to get the reactor operating again.
"The cost of removing and replacing the damaged parts, plus cleaning the whole system, may be well above Ft 2bn, and Paks is likely to succeed in fully passing on this cost to Framatome," Aszódi said. "However, it is very uncertain whether the approximately Ft 20bn revenue Paks will lose during a year, due to the non-operating block, can be claimed back from Framatome."
As for the reasons for selecting TVEL, Aszódi said the references the Russian firm presented were on of the decisive factors. He also emphasised the firm's experience in dismantling spent fuel rods.
The Russian firm is to complete the cleanup work in eight months once permits are issued.

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PHARMACEUTICALS

Richter signs agreement with OEP on new drug system


Pharmaceutical producer, Richter, believes that an agreement signed with the National Health Insurance Fund (OEP) on the conditions of a new drug subsidy system "will guarantee that companies will not to pay more to the drug subsidy budget than would be justified by their respective sales turnover," the company said in a statement, reported Interfax News Agency.
Richter was one of 101 pharmaceutical producers that signed an agreement with the OEP, representing 97.5 per cent of the pharmaceutical market.
As of September 1st, producers will receive the full subsidy on state-subsidised medicines sold during each month, and make refunds later if the subsidy budget is overrun.
This was necessary as the government has maximised monthly drug subsidy payments in an effort to curb spending, while also stipulating that end-user prices of drugs may not increase in the remainder of the year.
In its statement, Richter stresses it is offering its profession support and wishes to be a partner to the OEP and the health care administration in devising and introducing a new subsidy system, to take effect on January 1st 2004, which could remain in place permanently and ensure that the state drug subsidy budget is not exceeded by margins seen in recent months.
In exchange for the producers' agreement to the new system, the government will augment this year's drug subsidy budget by a further HUF 3 billion - part of this will go towards subsidies for low-priced medication (under HUF 600), a market which Richter has been traditionally strong.

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TELECOMMUNICATIONS

Price war rages in mobile phone market segment


Hungary's three mobile operators are pushing price's down as the mobile market descends headlong into a price war, with leading market player Westel Mobile Rt ready to step in, the Budapest Business Journal reported.
"There is a fierce price war going on and Westel realised that it also had to do something, with penetration nearing its peak and the operators trying to take customers off each other," said Szabolcs Szikszai, an analyst at Takarekbank Rt.
The downward price trend is set to continue in the second half of the year, as poaching rival operators' clients will be the only way to boost the client base, Szikszai added.
Leading operator Westel is countering moves already made by its rivals by introducing a new pre-paid plan on September 1st. This offers a flat-rate Ft 33 per minute charge for calls within the Westel network and domestic landlines at all times. Westel will charge Ft 39 per minute for calls to the other two GSM networks in Hungary.
The price war got underway on July 1st when Hungary's smallest but rapidly growing operator, Vodafone Hungary Rt, launched its pre-paid "Uno" package, charging Ft 39 per minute for all domestic calls, regardless of the time of day and which network is being called.
Then Hungary's number two player, Pannon GSM Rt, cut its fee to Ft 36 per minute at all times in Hungary from August 1st, also independent of network, dubbing this the Praktikum Perfekt prepaid package. Subscribers of the Praktikum Perfect prepaid package earlier paid Ft 105 for a one-minute call in the peak period. All fees quoted include taxes.
Szikszai said Vodafone Hungary is the clear leader so far this year, in terms of attracting new subscribers, and has put a lot of pressure on its larger rivals.
Operators have to restructure other pricing elements in order to finance the aggressive pricing, according to Szikszai.
Pannon's recent decision to scrap per-second charges, changing the minimum call charge to half a minute, was necessary in order to prevent revenue per user from plummeting, he said.
"From an economic point of view, they had to take this step. There are a lot of short calls. Whatever marketing disadvantage they may incur, I expect them to be financially better off," said Szikszai.
Pannon has had a much better year than rival Westel, which has lost a significant number of subscribers, according to Szikszai.
"Pannon looks much better at controlling costs, and hasn't lost as many subscribers as Westel. It has even added subscribers," he said.
The day after announcing the new package, Westel said it would end its 777sms free internet service as of August 18th. Westel users will still be able to use the free service through WAP, but will have to pay the fee to access WAP.
Until now, anyone, even non-Westel users, could send a free SMS from the service's website.

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TOURISM

Hungary, China to launch more flights to assist increasing tourism


Flights between China and Hungary are planned to be extended from the current four to seven flights, and from the current one to five destinations, the minister of economic affairs and transport, Istvan Csillag, has said at a briefing on his talks in Beijing, Kossuth Radio has reported.
He said the two national airlines would prepare the expansion plan jointly. Hungary was granted the so-called state-approved target country status. In the framework of this, Chinese tourist groups will arrive in Hungary as early as at the end of this year and at the beginning of next year.

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