HUNGARY

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Area (sq.km)
93,030

Population 
10,045,407

Capital 
Budapest

Currency 
Forint 

President 
Ferenc Madl

Private sector 
% of GDP 
60%

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Update No: 091 - (26/11/04)

Hungary to remove its 300 soldiers form Iraq
Hungary announced recently that it would withdraw its 300 troops from Iraq, becoming the latest country in the 32-member US-led coalition to bow to public pressure and prepare to bring its soldiers home.
Speaking at a ceremony marking the end of military conscription, the newly appointed prime minister, Ferenc Gyurcsany, a former communist youth leader turned millionaire businessman, said Hungary was obliged to leave its soldiers there until the Iraq elections, scheduled for January. "To stay longer is an impossibility," he said.
Iraq's interim government had asked Hungary to leave its troops in the country for another year. But Peter Matyuc, a defence Ministry spokesman, said in a statement that the government would ask Parliament to extend the troops' mandate by only three months.
"By March 31st, 2005, we will bring our troops back from Iraq," Gyurcsany said. "From then on, the existence of a stable democratic and safe Iraq has to be created by different means, above all political means. If Iraq is not safe, Hungary is not safe."
In the "letter of eight" signed in January 2003, Hungary joined ranks with Poland, the Czech Republic, Spain, Italy, Portugal, Denmark and Britain in supporting the Bush administration's war plans, a move that further deepened European divisions over Iraq.
It also led Defence Secretary, Donald Rumsfeld, to play off European countries against each other, describing the governments that opposed the war as "Old Europe" and those who supposed Washington as "New Europe."
Gyurcsany's announcement reflects growing public opposition toward keeping troops in Iraq. More than 60 per cent of Hungarians say they want the soldiers withdrawn.
It also shows how the Bush administration is finding it increasingly difficult to keep the coalition together as the insurgents' attacks in Iraq increase and coalition allies question how Washington has conducted the war.

Socialists get poll boost
For adopting this populist position on Iraq and other reasons, the ruling socialists have seen their popularity rise since Gyurcsany came to power, an opinion poll suggested in late October
The poll by the Szonda Ipsos agency put support for the Socialist Party at 41 per cent in October, up from 35 per cent the month before. The rightist opposition Fidesz party saw its support drop to 48 per cent from 53 per cent in September.
The poll was conducted among a representative sample of 1,500 adults between October 5 and October 15.
The upswing in support from the socialists comes in the wake of Gyurcsany's ascent to the premiership in September, when the charismatic millionaire businessman replaced former premier Peter Medgyessy.
Gyurcsany's populist style may have impressed the voters but it has unsettled financial markets fearful the new premier will not have the political commitment to see through economic reforms aimed at reining in Hungary's huge public sector and current account deficits. 

The economic dilemma
Gyurcsany took office vowing to raise living standards, while curbing spending in the new European Union member state, which he has termed a "free but unjust" society. But market analysts say that Gyurcsany is unlikely to succeed on both counts and the country could miss its aim of joining the euro in 2010 unless fiscal policy is tightened. 
The 43 year-old premier has pledged to raise income, which averages a mere 94,000 forint (384 euros, US$470) per month, while staying on track to adopt the euro by decade's end. That would require Hungary to reduce the public deficit to under 3.0 per cent of gross domestic product (GDP) by 2008, which analysts say the country is unlikely to do. 
Complicating Gyurcsany's task is the fact that he came to power mid-way through the four-year election cycle after his predecessor quit. 
Some observers say this pressure to endear himself to the electorate is likely to lead to a return to free-spending ways. "Hungary has a very long tradition of overspending, especially when elections are near," said Orsolya Nyeste of Erste Bank in Budapest, recalling the 2002 election year when the deficit soared to 9.3 per cent of GDP. 
"At this point the market in general is not banking with Hungary joining the eurozone in 2010, which says a lot about the likelihood of the government meeting its deficit targets," she said. 
Hungary has failed for three years in a row to meet its deficit goals. 
Last month, the government revised upwards its deficit target for year-end 2004 from 4.6 per cent to between 5.0 to 5.3 per cent of GDP. Some analysts say, however, the deficit could top 5.5 per cent. 
In 2003, the deficit was 6.1 per cent compared to the original forecast of 4.8 per cent of GDP, which led to the sacking of then-finance minister Csaba Laszlo in January this year. 
Gyurcsany's Finance Minister Tibor Draskovics has emphasised that the Socialist-Liberal government can reduce the deficit and address the pressing needs of the electorate through income redistribution and scaling back the state bureaucracy. 
"Creating jobs, helping large families and young people, developing infrastructure and saving state funds" are priorities in 2005, Draskovics said Thursday after submitting to parliament the draft budget for next year. 
"At the same time (the budget) brings us one step closer to the adoption of the euro in 2010," he hastened to add. 
Along Gyurcsany's ideology of having the rich share more of the financial burden, the draft budget would tax the interest rate margin of financial institutions, introduce a capital gains tax of 25 per cent and raise dividend taxes from 20 to 25 per cent. 
The budget also foresees a five per cent across the board cut in the spending of government institutions. 
On the other hand, Gyurcsany would streamline taxes which should favour the lower middle-classes and also offer state aid for young couples looking to buy homes.
While analysts say the government's forecast of economic growth of four per cent and inflation of 4.5 per cent next year is realistic, few think the country will respect its deficit goal of between 4.5 and 4.7 per cent of GDP for year-end 2005. 
"It would be a miracle," said Raiffeisen Bank analyst Zoltan Torok. "Politicians have proved time and again that what happens within an election cycle is more important to them than adhering to long-term economic goals." 

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AGRICULTURE

August agricultural prices up 2.6%

Agricultural producer prices continued to grow in August, although at a lower rate than in July, according to figures released by the Central Statistical Office (KSH), Interfax News Agency reported.
Farmers received 2.6% more for their products on average than a year earlier - this compares to a year-on-year growth rate of 7.7% in July, and 13.5% the month before. Agricultural prices were up 5.9% in the first eight months of the year. At the same time, costs in the farm sector were also up a significant 12.3% in the period. Thus, the income position on agricultural products actually dropped 5.7% compared to a year earlier, the KSH said.

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AUTOMOBILES

Swedish auto parts firm sets up

Swedish auto parts maker Haldex AB opened a plant in Szentlorinckata, eastern Hungary, in October, where it will assemble truck parts, the Budapest Business Journal reported.
The firm will assemble 20,000 brake valves and 20,000 brake chambers for the brake systems of trucks in the first year, Bela Csonka, plant manager at Haldex Hungary Kft, said. Haldex Hungary is fully owned by Haldex AB.
However, he said that the number of brake chambers produced could increase rapidly.
"Around 200,000 brake chambers and 20,000 brake valves will be assembled by 2007 annually, worth around €50m," he added.
Currently, 30 people are employed at Haldex Hungary. That will be increased to 140 by 2007, said Csonka.
Haldex AB closed its assembly plant in the UK in summer 2004 to move assembly lines to Hungary, Csonka said. Haldex Hungary currently only has suppliers from the UK and Germany, but plans to employ Hungarian ones too.
The biggest buyer of Haldex Hungary's products is a plant of German truckmaker DaimlerChrysler AG located in Kassel, in Germany's Ruhr region, Csonka said.
Haldex Hungary is also a supplier of trailer makers. Its biggest buyer in this category is German trailer maker Schmitz Cargobull AG.
Haldex AB operates a retail network in Hungary, but does not currently supply its components directly to Hungarian truckmakers.
The Hungarian plant was inaugurated on October 12th. The 5,750 square-metre plant is situated on a 20,400 square-metre plot of land, according to a Haldex press release.
The release says Hungarian managers will run the plant, which complies with international quality assurance standards. It adds that the Haldex group will step down its production in the UK and Germany, while increasing output in Central and East European countries, in order to reduce its operational costs.
According to the website of Stockholm-based Haldex AB, the group employs 4,400 worldwide. It posted revenue of 6.036bn Swedish krona (€665m) in 2003. Its shares trade on the Stockholm Stock Exchange.

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AVIATION

Ex-CEO believed to be behind sole bid for Malev

A company backed by Ferenc Kovacs, former CEO of Malev Hungarian Airlines Rt, submitted the only bid in the airline's privatisation tender recently, according to press reports that remained unconfirmed by the State Privatisation and Holding Rt (APV) as of going to press.
The company that is believed to have submitted the bid, Aviation Solution International Kft (ASI), is owned by Hungarian private individuals and is managed by Kovacs, the Budapest Business Journal reported. 
ASI was one of the four companies that bought the tender prospectus - a prerequisite for submitting an actual bid.
Another firm showing interest was Euroinvest Rt, held by real estate tycoon Sandor Demjan.
Euroinvest supervisory board chairman Sandor Nyul told news radio station InfoRadio that Euroinvest previously struck a strategic partnership deal with Chinese Hainan Airlines Co Ltd, and hypothesised that if the current privatisation attempt falls through, and APV publishes the tender with better conditions, the two would still submit a bid for Malev.
Apart from Euroinvest, the prospectus was bought by Icelandair and a group that has current Malev CEO Laszlo Sandor among its members, according to newspaper reports.
Neither ASI's owners nor Kovacs were available by press time to confirm their bid.
Kovacs worked for Malev for 24 years, and then worked for aircraft manufacturer group Boeing as sales manager for Hungary between 2000 and 2003.
According to the APV, the bidder's plans regarding a capital increase in the company will be decisive in the evaluation of the offer. The bid must also contain warranties for the company's outstanding liabilities of Ft 36.2bn (€146m).
"Since, in this tender, the option of preferential employee ownership is excluded, majority ownership in Malev can only be obtained by an investor that undertakes contractual obligations regarding the employment and the improvement of working conditions of the airline's workforce," the APV stated.

Hungary to receive more budget flights

British no-frills airline Jet2 will launch daily flights between Budapest and Manchester, the company confirmed recently.
According to a press release by Jet2, which is a trading name of Channel Express (Air Services) Ltd, the first Budapest flight will take off on December 1st, as the inaugural flight to the company's new hub at Manchester. Tickets to Budapest - along with 8 other new destinations, including Faro (Portugal), Valencia (Spain) and Venice - went on sale September 29th.
Market rumours arose about Irish low-cost carrier Ryanair following Jet2, as Irish-owned Cape Clear Aviation Kft recently announced it was about to rent Balaton West Airport. The airline's communications department declined to comment on the announcement, which was made by the local mayor.
"Our route development scheme is in progress. Ryanair is in negotiations with several airports in several countries," a communications executive of the company said.
Cape Clear will rent the airport in question - located in Sarmellek, near Lake Balaton, and plans to upgrade it into a fully functional airport by next summer, owners of the airport announced recently.
"Cape Clear originally signed a contract with the local authorities of Sarmellek and Zalavar [owners of the airport] in April," Sarmellek Mayor Vendel Szabo told the Budapest Business Journal. "Now it is only waiting for the permission of the Civil Aviation Authority (PLH)."
Cape Clear is owned by Irish and Hungarian individuals. Gabor Horvath, one of the owners, said the company is in talks with various airlines which might fly to Sarmellek.
"Cape Clear is holding talks with airlines, among them some key market players," Horvath confirmed, while declining to comment on rumours about Cape Clear having ownership ties to Ryanair.
In order to boost the Sarmellek airport's traffic, Cape Clear will invest around Ft 1bn (€4.06m) in its infrastructure.
"We will invest in a landing light system, as well as an Instrument Landing System allowing planes to use the airstrip 24/7, irrespective of weather conditions," Horvath said.
According to Szabo, the airport in its present form can only be used in clear weather and good visibility conditions.
Szabo also mentioned that a Ft 670m non-repayable state subsidy will help improve and upgrade the airport's infrastructure, albeit in 2005 at the earliest.
Balaton West Airport recorded 21,200 passengers, 120 large aircraft and 1,240 small aircraft in the first nine months of this year. In the whole of last year, the number of passengers totalled 22,000.
In related news, US-based NetJets Inc has been reported as planning to expand its activities - private and corporate aircraft rental services - to Hungary in the near future.

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CHEMICALS

BorsodChem eyeing Zachem

Hungarian chemicals company BorsodChem (BC) will definitely take a good look at bidding for Polish chemical firm Zachem when the company is offered for privatisation, BC CEO, Laszlo F Kovacs said, Interfax News Agency reported.
Kovacs said Zachem's TDI manufacturing capacity of 60 kilometres per year would fit well into BC's portfolio. "When the Polish government decides on the firm's privatisation, we will thoroughly examine the possibility of bidding," he said.
The CEO noted that there are several opportunities for carrying out acquisitions in Poland, with the state planning to sell its chemical industry assets in the near future. In addition, the growth potential of the firm could make it an attractive investment target for Polish investment funds. BC is currently carrying out a HUF 70 billion investment programme, which is scheduled to be completed by early 2006. BC is the only producer of MDI, a key component of isocyanates, in the region, and is also the region's largest manufacturer of TDI, another isocyanate compound. Currently, MDI and TDI sales account for 63 per cent of the firm's revenues, which will rise to 75 per cent after the completion of the investment programme. BC is looking for acquisition targets that could be integrated into either its upstream or downstream operations, and would improve the company's pricing position on the CEE market.
BC has been present in Poland since 1996, and has a 13 per cent share of the PVC market and 42-43 per cent of the MDI and TDI markets there, according to Kovacs. Kovacs also said that he has high hopes for the stock's trading in Warsaw, and trusts that that it will be included in the WSE's benchmark WIG-20 index upon the next revision. Turnover in BC shares in Warsaw should be at or near Budapest levels, he added.
The CEO revealed that according to an agreement with Japan's Mitsui, which is providing the technology for the current investment programme, a possible next investment could be carried out outside of Europe. Regarding the firm's dividend policy, Kovacs said management will propose a dividend of no less than 0.12 Euro per share (the average of dividends paid in recent years) at next year's AGM (annual general meeting), and plans to pay rising dividends each year.
On the company's medium term outlook, Kovacs said BC is looking forward to a "good period" for the chemical sector, with a positive business cycle expected in 2005 and 2006 despite high oil prices.
He said that a US$52 per barrel oil price has already been priced into ethylene and toluolbenzol prices, and MDI margins are now back at "a healthy 30 per cent" after a smaller decline when oil prices started to rise.

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ENERGY

Hungarian oil company sells gas trading, storage unit to German buyer

The gas trading branch of the Hungarian oil company Mol was sold recently. Mol sold three-quarters of its gas trading and storage branch and half its Russian-Hungarian company responsible for imports, Hungarian television M2 satellite service reported. 
The buyer is the German company EON-Ruhrgas, which has been active in Hungary for a long time and which also wants to purchase further parts of the Hungarian gas business. 
Experts earlier estimated the value of Mol's gas branch, which was loss-making for a long time, at 2bn euro. After lengthy tendering process, the German company gave the winning bid. Mol now can expect a revenue of about 800m euro, part of which will go to the Hungarian state, which has 12 per cent share in the company. The oil company wants to use the free resources for further expansion. 
According to the chairman of the German company, people should not worry about the safety of gas supply because besides Russia, the company is able to purchase gas also from The Netherlands and Norway. 

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INFORMATION TECHNOLOGY

Indian firm to establish IT centre

Satyam Computer Services Ltd, a globally active Indian consulting and IT services company, is setting up a new "near-shore" development centre in Budapest that will initially employ 55, a source close to the investment said recently, the Budapest Business Journal has reported.
In time, the source said, the facility could employ a "couple of hundred people."
"The centre will serve existing Satyam customers in all of Europe, and also help the company to bring in new customers in the region," said the source, who requested anonymity. "Investment in such a business is never just a one-off investment. The investment will grow as the business grows."
The source added that while the initial set-up cost of the centre is US$100,000, this will be followed by an ongoing investment of US$20,000-US$25,000 in each extra person employed
The establishment of a Hungarian subsidiary is part of Satyam's global delivery model, aiming to create closer contact with its European customers, and also reflects a global trend towards near-shore outsourcing, explained the source.
"Near-shore outsourcing gives the client the benefit of process maturity and cost advantages, while ensuring proximity to the work carried out. Customers can oversee software development, and the outsourcing partner can make sure that the clients benefit from global best practices," said the source.
"Best practice does not always translate across great distances, especially when the development work is carried out at discreet locations," the source added.
Investors in most IT companies and advisors are suggesting that IT companies follow this model, according to the source.
"Being one of the truly global IT's services companies, Satyam is offering near-shore outsourcing in Canada, China and the UK, among other places," said the source.
The centre will be located in the Info Park, District 11, home to a number of IT companies. It will open at the beginning of November.
"We are aggressively pursuing our expansion strategy to explore new markets and to partner with our global customer base across different geographies," Chairman Ramalinga Raju stated in a Satyam press release dated October 20th.
"Within the next few weeks, our European operations are being strengthened with the addition of a development centre in Hungary. This will help us address opportunities for near-shore services and provide access to East European business market," Raju added.
Satyam will carry out end-to-end IT services, dealing with three levels of IT business: IT consulting, application development and application maintenance. This mirrors Satyam's profile in other countries.
The source emphasised that while setting up a centre in Hungary does not provide cost savings comparable to those involved in investing in India, it gives more cost benefits to European clients than the UK for example.
"The centre will employ local IT experts, as well as experts from around Central and Eastern Europe, while access to Satyam's global pool of IT experts is assured wherever Satyam operates," said the source.
Satyam employs over 16,800 IT professionals, who work in development centres in India, the US, the UK, the UAE, Canada, Singapore, Malaysia, China, Japan and Australia. It serves over 350 global companies, including 109 Fortune 500 corporations.
For the year ended March 31st, 2004, Satyam posted revenue of US$571.27m, with after-tax profits of US$121.03m.
It has alliances with over 50 business and technology leaders and a presence in 45 countries across 6 continents.
Satyam practices its own global delivery concept, which it calls "RightSourcing." This, according to the company, means being as flexible as possible when it comes to how, where and when it works, with no compromise on quality.
"RightSourcing allows Satyam to give the customer the combined advantage of global skills at a competitive cost," according to Satyam's official website.

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MINERALS & METALS

Danish entrant hopes to benefit from rising steel demand in CEE

Bidding to benefit from increasing demand for steel products in Central and Eastern Europe, Denmark's Ib Andresen Industri A/S will next year launch a steel processing plant in Gonyu, on the outskirts of Gyor in northwest Hungary, the Budapest Business Journal reported recently.
Tom Andresen, the company's co-owner and corporate sales and marketing director, said recently that the local factory will primarily serve automotive and white goods manufacturing companies in the region.
"We expect demand for steel in Hungary and Slovakia will increase by up to 60% in the next 5 years," Andresen said. "I also expect the number of West European manufacturers will grow in Hungary, thus boosting demand for our services."
He noted that steel is a much sought-after product all over Europe.
"There is great demand for steel in the EU, and its price has doubled over the past year," he said. "Mass car producers will stick to using steel."
According to Andresen, the company's local plant will be located in Gonyu, the river port on the edge of Gyor that offers easy access to European waterways - the cheapest way of transporting steel.
The steel service centre will be constructed at a 10,000 square-metre site, as a greenfield investment. The Gonyu plant will create 25 jobs at the initial stage of the project, which Andresen later expects to increase to 60.
The plant, which will have two slitting lines and one blanking line, will process between 100,000 and 150,000 tons of steel annually, for clients in the CEE region.
According to Andresen, the company's major clients in the region operate in Slovakia and Slovenia, while the company has also been conducting talks with potential clients in Hungary. He declined to name these latter companies.
Andresen said the company's Hungarian market entry will mark its first expansion project outside Denmark.
The greenfield investment will cost between €15m and €20m, according to Andresen. He said this amount will be covered by a combination of a bank loan and own resources.
The company has also applied for partial EU funding, which - if approved - will back up to 6% of the total investment.
Describing the portfolio of 1b Andresen Industri, Andresen said the company focuses only on steel processing, and neither owns a steel mill nor produces raw steel.
Andresen explained that his company buys raw material from all over Western Europe, but is also eyeing East European steel mills with supply contracts in mind. He named Hungarian iron and steel manufacturer Dunaferr Rt among such potential partners.
Following the scheduled launch of the plant next spring, Andresen will become managing director. His father, also a co-owner of the company, will run the business at the firm's Danish sites.
The family-owned business was founded in 1967, Andresen said. According to information from its official website, it currently employs 572 people at its three plants in Denmark, and processes a total of 500,000 tons of steel annually.
The company posted net revenues of 604.6m Danish crowns (€81.3m) in the business year that closed on June 30th, 2004.

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