% 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: 082 - (01/03/04)
The Hungarians are pleasantly surprised at their popularity in Europe and the way that the West is increasingly viewing Hungary as an ideal bridge to the East. The Hungarians have received far more in the way of serious foreign investment than the Russians, some $20bn, and in more fruitful lines of activity in the long run than the oil industry.
The Scandinavians in particular keep investing in Hungary. The Finns and the Swedes are doing so in abundance.
The lure of Budapest
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. Of Hungary's more than 22bn in FDI, 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 others under them, 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 $5.000.
Economy in crisis
Today everything has changed. The process was started off in late June. A massive currency crisis broke out.
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 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.
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 a 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
Low-cost carrier wings its way East
With Hungary and Poland poised to enter the European Union, it makes sense that they should have what other highly developed countries have: a no-frills airline with a goofy name, the International Herald Tribune reported on February 13th.
Enter Wizz air, a low fare carrier that will make its maiden flight in May from Katowice, in southern Poland, to one of 10 destinations around Europe. Wizz aspires to be the No.1 airline in central Europe by 2005.
If that sounds a bit optimistic, consider that Wizz has signed leases for nine, 180-seat Airbus planes - a fleet that would daunt most start-up airlines, at least until they had demonstrated they could fill a single plane.
Wizz's backers, however, are convinced that the eastward expansion of Europe will create a vast new market for air travel. On May 1st, the European Union will phase out aviation treaties designed to protect national carriers - throwing open the market to any European upstart.
"Seventy million people will join the European Union in a couple of months," said Jozsef Varadi, the chairman of Wizz Air, who runs the airline from a suite of offices in a suburb of Budapest. "It's a huge market, with very little to serve these people right now."
Never mind that many of Wizz's potential customers have never flown on a plane, let alone had to choose between carriers. Or that the Internet, on which 90 per cent of the passengers of budget airlines book their flights, has only half the penetration in central Europe as it does in the west.
Among Wizz's likely passengers, Varadi cited the thousands of Polish immigrants who work in Paris and London. At the moment they have to endure 24-hour train trips back to Poland to visit their families. Soon, they will be able to fly home on Wizz for virtually the same cost.
"Families were broken apart decades ago because of the underdevelopment of eastern Europe," Varadi said. "They're now trying to reunite and we are providing the infrastructure for that."
That is as close as Varadi comes to a social rationale for Wizz. A former chief executive of the Hungarian state carrier, Malev Varadi, 38, is a no-nonsense businessman who prepared himself for this venture by visiting successful budget carriers, including Ryanair and EasyJet in Europe, JetBlue Airways in the United States, and Virgin Blue in Australia.
His conclusion was that no-frills airlines can only survive if they grow large enough, quickly enough to make their operations efficient.
The competition in the low-cost market, he said, is so cut-throat that a new entrant did not have the luxury of several years to build a franchise.
"We think that in Europe, there will be a consolidation that will leave no more than three, four, maybe five, big successful players," Varadi said. "We want to be a player in that premiere league."
Even the well established players have taken their lumps, however. Ryanair, Europe's largest low-cost carrier, warned of lower profits recently, and was ordered by the European Commission to pay back about €3m, or US$3.8m, in illegal subsidies it has received from Charleroi, the Belgian city south of Brussels, where Ryanair offers service.
Wizz signed an agreement recently with Charleroi's airport, but Varadi said it did not include subsidies.
Like Ryanair, Wizz will generally fly to secondary airports outside major cities. It hopes, however, to establish a base at the international airport in Budapest.
The popularity of cheap flights in Europe has crowded the skies with nearly 30 budget carriers. There is even competition in the East: Air Polonia, which flies from Warsaw to London, and SkyEurope, which is based in the Slovakian capital of Bratislava and flies to London, Paris and Milan.
Horth said he was skeptical that central Europe would be a bonanza, given the region's relatively low per-capita income and the lack of airline traffic.
Other experts, however, said Wizz could carve out a niche in southern Poland, which is populous and not heavily served by airlines.
"In our studies, Poland comes up as the single most attractive market in central Europe," said Heiko Schulz, a consultant in the Munich office of the Monitor Group.
Wizz has not published its fares, but Varadi said it would try to persuade people that flying was as economical as driving, or taking a train or bus. He said he expected three-quarters of his passengers to come from within the region. In addition to major cities, he plans to offer holiday destinations, like southern Europe in the summer and the Alps in winter.
The comparatively low level of Internet users in central Europe could pose a hurdle, Varadi said. He said the airline would compensate by setting up call centres and working with travel agents.
Fashioning an image to lift Wizz out of the crowd will be another challenge.
Varadi said he chose the name because it was dynamic, easy to pronounce, and carried no cultural connotations - no small matter in this part of Europe. He has settled on a purple-and-pink colour scheme for the planes.
Hungarian central bank maintains inflation target irrespective of euro date
The main target of the National Bank of Hungary [MNB] is to reduce inflation to 4 per cent, which has been set as the target for the end of 2005. After that, the aim is to maintain a stable rate of inflation at around 3 per cent, MNB spokesman, Gabor Misura, said. He added that, independently from the expected date of the introduction of the euro, the aim of the National Bank of Hungary was to achieve and maintain price stability.
The central bank expressed its position after Gyoergy Sandor, the bank's executive chairman, had said in London that the 4 per cent inflation target might change if the date of joining the euro zone changed, Kossuth Radio reported.
Energy sector braces for more taxes
The Budapest Business Journal reported that the introduction of new energy consumption and environmental taxes this year will be a challenge to the competitiveness of the energy sector.
"The introduction of the Energy Tax and various environmental charges will mean a burden of around Ft 100m [€380,000] on our company in 2004, which we will partly pass on to our clients," said Laszlo Balla, spokesman of the Hungarian operations of US power firm AES Corp. "On a liberalised power market, this will mean a competitive disadvantage for us."
"The new taxes will cost us Ft 700m this year, but due to a Ft 500m technical upgrade we will carry out this year, we hope to reduce the fee by 40%," remarked Jozsef Valaska, chairman of the board at Matra Power Plant Rt.
The government is phasing in new environmental charges. The first two components, the air pollution fee and the water pollution fee, came into effect on Jan 1st. They are expected to generate revenue of Ft 11bn for the central budget in 2004, most of which will come from the energy sector.
The fees will be calculated based on a long "price list," indicating the fees set for each of the pollutants a company has released. Such pollutants include sulphur dioxide, nitrogen oxide and carbon monoxide in the case of air pollution, and various heavy metals and sodium compounds in the case of water pollution.
"The idea is to encourage companies to reduce pollution by making them pay for every gram of polluting material they release into the environment," said Miklos Tatrai, the ministry undersecretary responsible for the issue.
At the same time, companies still have to pay the already existing fines when they exceed officially set emission limits, he added.
The third component - a fee on soil pollution - will be introduced in 2005.
The tax on energy consumption, aimed at encouraging consumers to save energy, will be Ft 186 per MWh for electricity, and Ft 56 per GJ for natural gas. The energy tax, which was introduced in line with EU regulations, will be refundable if, for example, natural gas is used for generating electricity for the company's own use.
The new taxes - of which the energy tax mainly affects power traders, which the environmental fees apply primarily to power producers - together are expected to cause a 2% rise in energy prices, to be borne by end-users.
T-Mobile rebranding seen strengthening Deutsche presence
Changing the brand name of Hungary's leading mobile company from "Westel" to "T-Mobile" would show Deutsche Telekom AG's long-term commitment to the Hungarian market, but would present communication challenges that must be approached with care, observers said.
Leading fixed-line telecom Matav Rt, which is majority owned by Deutsche, confirmed recently that it is considering changing the name of its subsidiary, Westel Mobil Rt. It declined to say whether, as claimed in an article on news portal Prim Online, the possible new name would be T-Mobile - the name used by Deutsche for its mobile operations in other countries.
"I don't see any danger from a marketing point of view. The important thing is that it shows that Deutsche wants to keep Westel in its portfolio," said Szabolcs Szikszai, an analyst at Takarekbank Rt.
"It is part of the process of balancing EU and newly accessing countries, meaning that extremely successful local brand names in most cases need to be changed," commented Gabor Hegyi, managing director of corporate communications firm Capital Communications Kft.
Prim Online said Westel will change to T-Mobile in May, while retaining the name "Domino" for its pre-paid cards. If true, such a change would mirror what has happened at other T-Mobile subsidiaries. For example, T-Mobile's British subsidiary changed from One 2 One to T-Mobile UK in 2001.
"For the time being, we don't have any comment on this," Westel's deputy general manager, Janos Winkler, said, the Budapest Business Journal reported recently.
Changing a brand name requires a huge and expensive campaign involving special caution on behalf of PR and marketing communications experts, Hegyi said.
"A new name can provoke protests from some customers," he said.
Klaus Czerwinski, spokesman for T-Mobile International, Deutsche's international mobile subsidiary, said that T-Mobile had nothing to add to Matav's statement. However, he said that in countries where Deutsche Telekom's mobile holdings have switched name to T-Mobile, the two brands run together for a period before fully switching over to T-Mobile.
Hegyi said using the old and new name together for a period is not a good idea, as it leads to confusion.
"It should be said that the company is proud of the previous brand, but it should not be kept when the new one is introduced," Hegyi said.
He added that when designing the campaign, it is very important to emphasise the past and the values of the old brand, as well as the international and technological background of the new.
"Our local and international experience shows that changing the brand name should not be a problem if the campaign is well designed and executed," said Hegyi.
A global brand name can be a powerful attraction, Szikszai commented. He said that many of the subscribers of Hungary's third mobile market entrant, Vodafone Hungary Rt, were lured by the idea of joining the world's largest mobile provider.
"Renaming Westel as T-Mobile would help emphasise to subscribers the advantages of being part of a multinational organisation," he said.
Currently, there are six companies using the T-Mobile brand. The companies in Germany, Austria, the US, the UK and the Netherlands are all fully owned by Deutsche Telekom. The one in the Czech Republic is majority owned by Deutsche.
In Hungary, Westel is wholly owned by Matav, which in turn is majority owned by Deutsche Telekom. Deutsche is Europe's largest telecom company.
Deutsche also holds minority stakes in mobile firms PTC in Poland and MTS in Russia, as well as indirect shares in mobile phone companies in Belarus and Canada.
In addition, Deutsche Telekom is represented in Macedonia, Croatia, Bosnia-Herzegovina, Slovakia, Ukraine and the Philippines.
Telco firms take the lead in providing wireless LAN
High-speed wireless LAN (Local Area Network) internet hotspots are popping up around Hungary as industry players ponder how to progress with the technology, known as Wi-Fi, the Budapest Business Journal reported recently.
With demand for the service still very low, telecoms - not cash-strapped ISPs - are so far providing the impetus for the new technology.
Leading mobile operator Westel Mobile Rt claimed to be the first to offer the service commercially from December 1st, 2003, at terminals 2A and 2B of Ferihegy Airport and in all Westel shops.
Westel launched a pilot wireless LAN service at Ferihegy 2B a year ago. The commercial service has been introduced in cooperation with Budapest airport Rt, primarily for business users.
Wireless LAN enables holders of WLAN cards, laptops, PDAs or smartphones to have high-speed access to the internet.
The pricing is in 15-minute increments. Fifteen minutes costs Ft 500, with the password received valid for one month, explained Istvan Maradi, chief development officer at Westel. Sixty minutes costs Ft 2,000, with a three-month password.
Westel is planning to introduce wireless LAN at numerous high-traffic locations, including shopping malls and conference centres, in line with user demand. The vendors are Cisco Systems and Siemens, Maradi said, adding that for the moment Westel is not teaming up with ISPs.
Westel's parent, leading fixed-line telco Matav Rt, offers wireless LAN at the Café Gerbeaud, and in the Astoria, Sofitel and Korona hotels.
Cisco Systems is the provider for Matav, said Judit Sinko, marketing manager of Cisco Systems Hungary Kft. Cisco has its own hotspots at its Budapest offices and at Lake Balaton.
In late 2003, Matav also concluded a strategic cooperation agreement with Korean network specialist D-Link.
"We think hotspot technology is the next hot thing after wireless itself," Arne-Christian Mayer, product marketing manager of D-Link Central Europe, told the Budapest Business Journal. He envisages that everybody from ISPs to pizzerias could become customers of D-Link, and will be able to let outlets bill customers by voucher.
Klaus Dieter Hesse, D-Link's vice president for Central and Eastern Europe, said late last year that his company has already delivered hotspot technology for Matav, and is planning to open a local support centre in Hungary.
Sinko also mentioned that Cisco Systems provides equipment for Vodafone Hungary Rt, which is offering free wireless LAN at the Budapest Sports Arena, a facility for which Vodafone provides all the telecom needs.
"At present it's mainly for journalists during sporting events, while the second target group is exhibition participants," said Zoltan Takacs, product marketing executive at Vodafone.
To build extensive coverage around Hungary is commercially difficult for mobile operators, and it is likely that more independent operators will enter the market, Takacs said.
"At first there will be a number of hotspots and there will be a consolidation involving cooperation among mobile operators and independent operators in providing the service," he said. "Vodafone Hungary intends to strike roaming agreements with independent operators, so that our customers will be able to use wireless LAN."
However, Takacs conceded there is likely to be more demand from businesspeople visiting Hungary than from Vodafone Hungary's subscribers, who will prefer to use the service when they are themselves abroad.
"People need high speed when they're on the road," he said.
While local subscribers can be charged on standard phone bills, billing when roaming abroad remains complicated.
"We'll make use of Vodafone's international footprint," said Takacs.
A new report by London-based consultancy BroadGroup, called "Wi-Fi Tariffs Europe," dissects tariffs offered by 97 providers in 20 European countries, including four in Eastern Europe - Russia, the Czech Republic, Estonia and Poland. The survey concludes that Wi-Fi tariffs are converging on more standardised products as competition emerges from North American roaming entrants.
"Retail prices for public Wi-Fi in Europe remain quite high," said Philip Low, managing consultant at BroadGroup and author of the report. "However, entry by North American players with significantly lower price levels, could impact over time."
Based on research across all service providers, the report found that the average price for one-hour connectivity via public access WLAN throughout Europe is €6.47 (less taxes).
The report said the next 12 months will be crucial to the development of wireless LAN.
"Execution of the deployment plans in the next 12 months will determine the future of public Wi-Fi across the region," it said.
Plans finally approved for capital's fourth metro line
The first few tenders for the construction of Budapest's much-delayed fourth metro line will be called in the first half of 2004, city officials said recently, reported the Budapest Business Journal.
The announcement was made after the Budapest City Council approved the draft contracts for the construction of the new metro line recently. These are to be signed by the city, the state, the treasury and the public transport company Budapest Transport Rt (BKV).
"After six years of delay, which caused the city losses of Ft 60bn [€224m], the metro project has finally been put on the right track," Budapest Mayor, Gabor Demszky, said recently.
The Ft 195bn metro project, the largest infrastructure project launched in Hungary for several years, will create a 7.3km metro track, running from District 11's Kelenfold to Keleti railway station in District 7.
The first tender, for the construction of the metro tunnel, is expected to be called at the end of April, said Jozsef Pandula, deputy director of DBR Metro Project Directorate, the company in charge of preparations for the metro construction. It will be followed by tenders for building the structure of metro stops, for buying metro cars, and for creating an integrated metro management system, he added.
"All the projects will be open to international tenders. Each will have a value in the range of Ft 10bn," Pandula said.
Of the total project cost, the state will finance Ft 154bn and the city Ft 41bn, Deputy Mayor, Janos Atkari, said. These sums will cover the cost of building the tunnels, stations and ventilation system, buying cars and developing a management system, he said.
Atkari said the cost of surface work, such as reconstructing road surfaces, is calculated at Ft 35bn. Since this work is not treated as an integral part of the core metro project, the state will not take part in its financing.
Atkari said the project still needs a permit from the railroad authority, after which the first tenders for the project can be advertised. The new line is slated to open at end of 2008.
Until the metro bill was passed by Parliament last year, one of the delaying factors was the lack of legal guarantees concerning the government's long-term financial obligations.
This problem first surfaced four years ago, when the then Fidesz-led government nullified a decision made by its Socialist-led predecessor to finance a certain part of the metro project, Demszky said.
However, the bill on the metro authorised the finance minister to sign an agreement with Budapest City Council.
"The new law ensures that once the government signs a contract as a private legal entity, it will not be able to withdraw from it by pointing to its limitations as a public entity, such as a lack of resources in the annual budget," Demszky said.
The law also states that in the event of the government wanting to sign similar contracts in the future for a value above Ft 50bn, it will have to seek approval from Parliament.
The bill is expected to pave the way for other projects requiring the government's long-term commitment, like public-private partnership projects.
According to Padula at DBR Metro, later plans include extending the metro line all the way to District 14's Bosnyak ter. Due to a lack of financial resources, the government has only agreed with the city on the shorter version for now, he explained.
The entire metro project is expected to have a total budget of around Ft 300bn, Pandula said. Related plans include resurfacing Thokoly ut in Districts 7 and 14, renovating Szabadsag Bridge, and constructing a 1,500-unit park-and-ride facility at each of the two end stops.
The first sections are expected to be completed by 2005. The entire first phase will be open to users in 2008. The new line is expected to carry 600,000 passengers a day.
The city and the central government intend to finance 75% of the project's costs from a loan granted by the European Investment Bank (EIB).
Accordingly to Pandula, the terms of the EIB loan are very advantageous.
"The EIB loan will have a floating interest rate, depending on the currency and EIB's own costs," he explained, adding that EIB loans usually are 50-60 basis points below the Libor rate.
The EIB loan will be extended for 25 years, with a seven-year grace period.
According to plans, Hungary will apply for financing for up to 15% of the project's costs from the EU's structural funds after 2007. Even if the project receives funding from the EU, the city and the government will maintain their agreed 30%-70% split in shouldering the remaining costs.
"Hungary has a good chance of receiving some funding, as the EU also supported the metro construction in Athens and Lisbon," Pandula said.
Hungary's first EU-compatible motorway tender called
Seventeen companies expressed their interest in the pre-qualification process of Hungary's first international tender applying to the construction of motorways, according to National Motorway Rt (NA), the Budapest Business Journal reported.
At the tender advertised in December for the construction of eight stretches, companies that have never built motorways in Hungary were also allowed to take part, said Attila Tompos, EU coordination director at NA.
"The story started last year, when the international tender for the reconstruction of Road 35 and Road 3 was won by a Hungarian-Slovak consortium," Tompos said. That contract went to Inzinierske Stavby a.s. and Viadom Construction Industry Rt.
"As we get closer to EU membership, its directives on procurement have to be applied," he added.
Tompos said that although the tender was announced last December, the country will be an EU member by the time the contracts are signed with construction companies. A new public procurement law will take effect from May 1st.
"In the normal run of things, tenders are called at the end of the year, contracts can be signed in the spring after the necessary procedures, and the work can start in the summer," Tompos said, adding that the exact deadlines for such works are prescribed by the Procurement Act.
The companies, which submitted a total of 75 applications, include Skanska DS. As. Based in the Czech Republic, Mota-Engil Engenharia Construcao SA of Portugal, HABAU Hochund Tiefbaugesellschaft mbH of Austria, ENGEOCOM of Russia, Porr Technobau und Umwelt Aktiengesellschaft of Austria, Inzinierske Stavby a.s. of Slovakia, and Hungarian-based companies Betonut Rt, Hidepito Rt, Egut Rt, Vegyepszer Rt and Strabag Rt.
"Skanska has been waiting for this opportunity for a long time," said Emese Horvath, project development manager at Skanska Property Hungary Kft.
"The construction arm of the company has great experience in this field. Although it pulled out of Hungary, motorway construction provides a good opportunity for a comeback," she added.
Gyula Timar, president and CEO of Vegyepszer Rt, said he is not afraid that the new type of competition will threaten established local motorway constructors.
"The international tender does not necessarily mean stronger competition," Timar said.
"NA is examining the eligibility of the applicants. It is too early to talk about the possible outcomes of the tender," Timar added.
Tompos said that in the restrictive procedure applied in the EU, the contract requirement is first advertised. All interested companies are invited to declare their intent to take part in the tendering process. After examining the eligibility of the applicants in the pre-qualification process, the contracting authority selects those who can take part in the tender.
"This procedure is favourable for the contracting authority, because after the pre-qualification process it can pay more attention to the eligible applicants," Tompos said.
Construction of motorway sections and bridges, most of which will belong to the M3 and M7 motorways, will start this year and must be finished in 2005-2007, according to the tender announcement on December 17th.
NA will invite bids for one more project soon. The nine jobs will together be worth Ft 400bn (€1.5bn), press reports said.
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