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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: 090 - (27/10/04)

New cabinet sworn in
Ministers in the Cabinet of newly elected Prime Minister Ferenc Gyurcsany were sworn in on October 4th. He proclaims that his main objectives are to push to raise living standards and to apply "truly Social Democratic" values to Hungary.
Gyurcsany - elected in September on a 197-12 vote - has named seven new ministers and kept 10 of those who served during the two years in office of Gyurcsany's predecessor, Peter Medgyessy. Among those staying are Finance Minister Tibor Draskovics, Defence Minister Ferenc Juhasz and Culture Minister Istvan Hiller.
Kovacs, who will become the European Union's commissioner for energy affairs, was stay on as foreign minister until the end of October. He was to be replaced then by Ferenc Somogyi, a deputy ambassador to the United Nations in the 1980s and recently a phone company executive.
The man symbolically credited with causing Medgyessy's demise will not be part of the new Cabinet. Istvan Csillag, whose attempted dismissal by Medgyessy backfired, resigned in September to "spare the new government of unnecessary conflicts."
Janos Koka - founder of a local telecommunications firm and, like Gyurcsany, one of Hungary's richest businessmen - will step in for Csillag as minister of economics and transportation. Others new to their posts are Justice Minister Jozsef Petretei - a legal scholar from southern Hungary - and two ministers without portfolio: Etele Barath, co-ordinating EU affairs, and Istvan Kolber, overseeing regional development.
Eighteen months before the next parliamentary elections are due in April 2006 and trailing the centre-right opposition, Fidesz, by some 12-15 points in the polls, Gyurcsany, 43, says his government will represent "true Social Democratic" values.
The Socialist-led coalition, which also includes the Alliance of Free Democrats, ousted Medgyessy in late August, frustrated by his lack of leadership and direction for government policies.
A property and manufacturing tycoon who was a communist youth leader in the 1980s, Gyurcsany vowed his Cabinet would be much more decisive and establish a markedly left-wing tone. "I envision a left wing which has the courage to be outraged by social injustices and has the strength to do something about them," Gyurcsany said in an interview in the daily newspaper Nepszabadsag. "Our government stands by the principle there should be more responsibility taken above and more opportunities below."
Among the first policies he announced were the introduction of capital gains tax, higher taxes for banks and lower income taxes benefiting most those earning near the average monthly wage of 142,300 forints (€550).
Thirteen members of Gyurcsany's Cabinet are Socialists - including the only two women - while four were designated by the Free Democrats.
Peter Kiss, whom Gyurcsany defeated to gain the Socialists' nomination, will continue to direct the Prime Minister's Office. The only significant structural change is the elimination of the Youth and Sports Ministry, which Gyurcsany led before taking over as head of government.
Attila Abraham, who won Olympic gold, silver and bronze medals in kayak, will handle sport matters as a state secretary at the Prime Minister's Office.
The thrice-married Gyurcsany, who left politics during Hungary's transition to democracy in 1990 and returned in 2002 as a key adviser to Medgyessy, has four children.

Blair goes to Hungary 
Gyurcsany is often compared to Tony Blair. They have a similar charisma and commitment to 'modernisation,' which to the more traditional of their parties seems to be an opportunistic theft of the policies of their conservative opponents. Gyurcsany is leading the biggest transformation of his Socialist party since its 1989 creation from the remains of the communist regime that ruled Hungary for more than 40 years. Gyurcsany, one of Hungary's richest businessmen, said that while the socialists no longer saw change as a struggle between social classes, there should be "more responsibility taken above and more opportunities below." 
"While I accept Tony Blair's slogan that rights and responsibilities go hand in hand, if those rights aren't paired with opportunities, then it's no use," Gyurcsany said. "Many don't have opportunities, so that's why they can't be abandoned."
Hungarians had a chance to judge the extent of their similarity for themselves when Blair flew to Hungary on October 14th for a summit of 13 centre-left heads of government - with Iraq firmly off the agenda. Last year, Hungary committed 300 troops to the coalition effort in Iraq. One Hungarian soldier has died during the military operation. Public opinion is hardening against further Hungarian involvement. Gyurcsany says that Hungary will decide whether to pull out of Iraq or not after the US election.
The prime minister was attending a meeting of Peter Mandelson's Progressive Governance thinktank, which was being held in Budapest. 
In a joint article written for the launch of the conference, Mr Blair and Mr Gyurcsany called for reform of the common agricultural policy, and for maintaining better links with the US. The two leaders said that that the EU's agricultural policy needed "fundamental reform". "It ill serves our taxpayers, our farmers, our environment and partners in the developing world," they said. 
They also said the EU's constitution would strengthen its institutions while keeping "the free will of nations, collectively expressed," as its source of authority. "We need a union of nations, rather than a 'United States of Europe,"' the two leaders wrote. 
Mr Blair and Mr Gyurcsany said new EU countries such as Hungary - which joined in May along with nine other nations - brought to the union their recent experience of wide-ranging reforms. "We both believe that the experience and determination they bring to the EU will boost the pace of modernization, to the benefit of all of Europe," they said. 
Regarding relations with the United States, they said that the new members' attachment to the trans-Atlantic alliance was "particularly strong." "EU enlargement will bind it even more firmly together, but deep down all of Europe knows its importance," the prime ministers said. "It is vital that Europe is America's partner, not its rival nor its servant." 

The Third Way
Blair observed at the conference: "To put it bluntly, how can progressive politics win?"
The annual meeting of the Left-wing leaders was initiated by Bill Clinton, Blair and Gerhard Schroeder, the German Chancellor, in 1999 when they held a "wonkathon" to forge a "Third Way" in politics. 
The Third Way was the Left's answer to the "crisis of Keynsianism" which afflicted the West in the 1970s, and the free-market "neo-liberalism" of Thatcher and Reagan in the 1980s. It was designed to forge a middle way between the "tax and spend" state control and regulation of the old Left, and the subsequent "free-market fundamentalism" that insisted that the market always knows best. 
The Third Way shifted the role of the State from protecting people to enabling them, from being a net to a ladder. In those heady days of the Clinton/Blair honeymoon, it was going to solve the problems of the West, the former Communist countries, and the developing world to boot. 
Five years later, the meeting is happening under very different circumstances. It attracted a dozen Centre-Left heads of government including Blair, Thabo Mbeki of South Africa, Jose Luis Rodriguez Zapatero of Spain, Helen Clarke of New Zealand, Ricardo Lagos of Chile and Paul Martin of Canada. The Right has no equivalent meeting. But self-confidence has been replaced by an air of existential angst. Although it may sound unlikely to the British, where the Conservative Party is suffering a near-death experience, the international Left is feeling beleaguered. 
There has been a loss of political power and intellectual confidence. This year, the talk was about why the Third Way did not work and what should replace it. 
When the meetings were first convened, six of the G7 leading industrial nations had Left-wing leaders compared with four today. Of the then 15 EU countries, 13 were Centre-Left, but since then the Right has won control in Portugal, Italy, France, the Netherlands, Greece and Denmark.
In Germany, Schroder has slumped in the polls. The USA has a conservative President, while the European Commission is taking a distinctive lurch to the Right under Jose Manuel Barroso, its new President. In many countries, including Germany, far-Right parties are making dramatic advances. Mandelson said: "The stakes for progressive politics have never been higher." 
Matt Browne, director of Policy Network, said: "The Centre Left across Europe is struggling to define a political antidote to new kinds of populism that are fed and manipulated by a politically, if not ideologically, resurgent Right." 
Gyurcsany said: "We need to have the courage to have Left-wing values: social justice, solidarity and a society run in the interests of the many, not the few. For the Left, the alternatives are clear: reform or failure."
In the gilt baroque ballroom of the Corinthia Grand Hotel Royal, where Austro-Hungarian royalty used to dance the night away, the Left-wing heads of state were asked to pontificate on how to pursue progressive politics. Clark, the Prime Minister of New Zealand, said: "The key to success for social democrats is showing you can have a market economy without a market society." 
Mbeki, the President of South Africa, said that the most important thing was "to maintain the closest possible contact with the people. Allowing a distance between the Left and the people creates the space for the growth of other forces." 
But not one of the leaders mentioned the Third Way. In an essay for the conference, "Where now for the Third Way?" Browne wrote: "The Third Way was the vehicle that allowed the Left to regain its confidence, to take on and defeat a resurgent Right. But this is no longer enough." 
Delegates agreed that the Third Way simply did not provide answers to many of the world's problems: globalisation, the rise of the flexible-knowledge economy, rising crime, terrorism, modernisation of public services to give citizens both choice and flexibility, and integration in increasingly diverse and multicultural societies. 
Most of those issues have traditional Right-wing remedies, but what is the Third Way solution to global terrorism? The Left has yet to decide how to respond to the world's changing priorities, and the result is that in many pressing areas the Left is split. 
The most obvious division is over Iraq. Blair, a close ally of President Bush, and Senor Zapatero, who withdrew troops from Iraq after his surprise election victory, appear to have little in common. Iraq probably slowed down the process of the parties talking to each other. 
Some on the Left regard the USA as the biggest threat to the world; others see it as the strongest defender of liberal democracy. Some view globalisation as a source of the world's ills, others see it as the solution. While Paul Martin, the Canadian Prime Minister, was boasting of his record tax cuts, Goran Persson, Sweden's Prime Minister, was claiming to have proved that high taxes worked. 
Blair warned his counterparts: "There is a danger that progressive politics defines its economic policy by anti-globalisation, and its international politics by anti-Americanism." But one leading German politician said: "Tony Blair is only a supposedly Left-wing leader - he is easily to the right of [the French President] Chirac, who is supposedly a Right-wing leader." 
So what comes after the Third Way? Choice has always been the Right's rallying cry. Left-wing British MPs, for example, are bitterly opposed to Blair's and the Conservative Party's policy of giving NHS patients a choice of doctors and hospitals. The new idea is that all people should not just have equal opportunity - a passive concept - but be able to exercise equal choices in all aspects of their lives. 
The latest research shows that to give people equal choices in later life, you have to start early. Mandelson emphasised his own recipe: "First-wave Third Way policies were correct to place their emphasis on active welfare and policies to promote life-long learning. Unfortunately, they did not prioritise investment in the early years. Today, we need to promote the cognitive development of the young." His solution is less a political philosophy than a family-friendly policy: "In short, we must promote universal pre-school day-care." Here Sweden, as in so many other issues, provided a model: the revelation that Swedish children have the same chance of attending university whatever their social background caused a ripple of excitement.
But delegates realised that Sweden achieved its equality only by introducing universal education vouchers and giving parents money to send their children to whatever school they want, leading to a huge increase in the number of private schools. It is a policy that the British Left has worked hard to demonise as "a free market in education". 
So here is the agenda of the new, progressive equality-of-choice Left: in favour of globalisation, free trade, lower taxes, private providers in the public sector, and education vouchers; against state monopolies and newly concerned about mass immigration. 
Perhaps there is no need for the world's conservative leaders to hold conferences to set a Right-wing agenda. The Left seems to be doing it for them.

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AVIATION

New budget airline to fly to Budapest

Danish low-cost airline Sterling.dk will launch flights between Budapest and Copenhagen next year, the company confirmed recently, Budapest Business Journal reported.
According to Sterling's press release, the airline will launch regular flights between the two capitals in February 2005. With a change in Copenhagen, the cities of Billund (Denmark), Gothenburg, Oslo and Stockholm will also be available between February and October.
Sterling will be the fourth low-cost carrier to fly to Scandinavia from Budapest. SAS subsidiary Snowflake flies to Stockholm, Norwegian Air connects Ferihegy with Oslo, while Wizz Air recently launched its service to Stockholm and Malmo.
However, according to Ludmilla Lindecrantz, manager of Snowflake, the company is in a transitional period right now.
The company is restructuring its local flights, confirmed Maria Kormendy-Ekes, manager of the Hungarian office of SAS.
"Snowflake will cancel its two weekly flights from Budapest," said Kormendy-Ekes. "Instead, SAS will launch a service with 6 classic SAS flights every week to Stockholm, along with seven weekly flights to Copenhagen, and a number of tickets for these flights will be available through Snowflake."
All the above comes as part of SAS' "Commercial Turnaround" scheme, which establishes 3 classes instead of the business class/economy class model.
SAS' new Economy class targets price-sensitive travellers, offering basic services, with meals and refreshments available for purchase on board. The Economy Flex class offers increased flexibility in areas such as booking, refunds and seat reservation, along with complimentary meals and beverages. Business Class travellers are still treated with more comfortable flight conditions.
In practice, this means that for the flights in question, tickets will be available at travel agents for the business class and for the economy class - as well as for the "no-frills" price.
"Those who purchase tickets for economy class, with the Sunday rule and advance purchase requirements, will be offered the same service as those booking at Snowflake. This means that food and drinks can be purchased on board," Kormendy-Ekes said.
Kormendy-Ekes expressed caution as to whether the Scandinavian market can support all the low-cost carriers once Sterling enters the market.
"It remains to be seen," she said.
According to Natasa Kazmer, communications director of Wizz Air, there is ample space for all low-cost carriers on the Hungary-to-Scandinavia market, as long as they can weather the storm the industry in general is facing.
"The tendency of low-cost airlines competing on overlapping routes is becoming more and more apparent," said Kazmer. However, she added that only airlines with an effective cost structure will survive the imminent consolidation of the industry.
"But the market itself bears good growth capacity," she added.
According to Kazmer, Wizz Air's Scandinavian routes have proven popular among both Hungarians and Scandinavians.
"Besides, the number of connections to Scandinavia is still relatively low, especially considering that most Scandinavians have a penchant for travelling," she remarked.

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BANKING

Banking sector posts solid profit performance in H1

Hungary's banking sector realised a combined pre-tax profit of HUF 167.6bn (US$803m) in the first half of 2004, a strong 42.9 per cent increase on the same period last year, according to figures recently released by financial watchdog PSZAF, New Europe reported.
Although slower than last year, growth in the lending market accounted for much of Hungarian banks' profit. Loan stock increased to HUF 8.8 trillion this half compared to HUF 7.2 trillion in the same period last year, an increase of 23 per cent.
The slowdown in growth in the lending market was caused by reduced demand from domestic clients. This was especially noticeable in the mortgage loan market, where a tightening of government subsidies in June 2003 and again in December 2003 has hit demand. Mortgage loan stock grew by 14.1 per cent or HUF 196.2 billion since the end of last year.
Responding to pressure on demand by restricted subsidies, banks have introduced low-interest rate foreign currency denominated loans. Although still only representing a fraction of forint-denominated loans, foreign currency loan stock has grown vigorously.
Since the beginning of the year, stock has expanded 80 per cent to HUF 32bn. However, despite the relatively low numbers, some have raised concerns over the level of exchange rate and interest rate risk borne by customers, claiming that in some cases this has not been made adequately clear to borrowers. The proportion of foreign currency loans among corporate clients remains high at about 40 per cent. This represents a growth of 13.3 per cent in the first half of the year, five times higher than the growth of forint-denominated loans among commercial borrowers.
Significant demand for loans came from car financing which made up somewhat for the slowdown in demand for housing loans. Regarding corporate loans, PSZAF noted that domestic banks do not play a significant role in financing multi-national companies. The banking sector's combined assets increased by 19.8 per cent, from HUF 11.48 trillion in the first half of 2003 to HUF 13.8 trillion in January-June this year.
Strong revenue in the sector was attributable to high interest margins, increased activity as well as the availability of low-rate foreign currency loans. Operating costs in the sector were also down in the first half of 2003, to 3.01 per cent of total assets compared to 3.38 per cent during the same period last year. Both ROA and ROE were up year on year. The sector's ROA rose from 2.24 per cent in the first half of 2003 to 2.51 per cent in the first half of 2004, while ROE was 30.66 per cent, up from 24.48 per cent in the same period last year.
Growth in combined assets is expected to slow in the second half of the year due to reduced demand for mortgage loans, PSZAF said. Demand for corporate loans is expected to increase as a result of improved macroeconomic conditions and lower interest rates. Although growth in consumer loans is expected to slow, no significant fall is predicted.
Overall, growth in profit in the banking sector is expected to shrink in the second half of the year. Efficiency-improvement measures taken by the sector in the past, including cost-cutting and price hikes, will be harder to achieve in the future, PSZAF said. Hungary's savings associations increased total assets by 19.9 per cent in the first half of the year compared to the same period in 2003. At the end of June 2004, total assets of savings associations were HUF 9.79 trillion.

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CHEMICALS

VCP to sell 67.9% of BorsodChem

Vienna Capital Partners (VCP), the majority owner of Hungarian chemicals producer BorsodChem Rt, has announced that it will sell 47m shares in the company by way of a private placement, with an option to sell an additional 4.7m shares, Budapest Business Journal reported recently. 
The sale will be carried out through VCP's subsidiaries, CE Oil & Gas and VCP Industrie Beteiligungen.
In addition, it was announced that BorsodChem is seeking a listing on the Warsaw Stock Exchange (WSE).
The offering by VCP represents 67.9% of the issued share capital. The sale will be structured by way of a private placement of shares and Global Depositary Receipts (GDRs) to international and Hungarian institutional investors. The indicative price range is from Ft 1,775 to Ft 2,075 per share, and HSBC will handle the international sale.
According to Tamas Pletser, an equity analyst at Erste Bank Investment Rt, the timing of selling the stake is perfect. However, he added that the presence of VCP as shareholder represents a risk to the share price.
"The company is in very good shape, chemical margins are favourable, it has a good cash flow situation, and is vertically integrated. The only possible negative, aside from management issues, is the high oil price, which puts a squeeze on margins," Pletser said.
"The risk stems from the fact that nobody really knows what VCP's intentions are with respect to BorsodChem," he continued. "We know that it is not a strategic investor, but we do not really know what its plans are. To be fair, it has done nothing to harm the position of minority shareholders so far."
Pletser said that the free float - currently about 8% - could rise to 76% after the private placement, and that the market estimates a share price of Ft 2,000.
Pletser noted that, while the sale could give BorsodChem's share price a boost as the influence of VCP decreases, VCP will still effectively be in control of the company.
"BorsodChem will give an 8.3% stake to management in the form of employee shares, and VCP will have a 23.3% stake after the sale. It is believed that the two owners will act in unison when voting, and together they will have over 30% of the shares," he said. "The risk is that they may act in a way that will harm the position of (smaller) minority shareholders."
Speaking at a roadshow in London recently to promote the sale, BorsodChem CEO Laszlo F Kovacs said the company has substantial advantages over its West European rivals in terms of expenses. He cited cheaper labour and the fact that is a vertically integrated company that makes a large amount of its own raw materials, such as aniline and vinyl chloride.
Kovacs added that BorsodChem will receive special tax breaks until 2011.
BorsodChem is the largest PVC manufacturer in Central and Eastern Europe, the region's sole make of MDI, and a leading producer of TDI in the region. Since 2001, the company has stepped up its MDI and TDI production to lessen exposure to changes in PVC prices.
Unaudited IFRS figures show BorsodChem had consolidated net income of Ft 10.25bn (€41m) in the first half, compared to losses of Ft 782m a year earlier.
As part of its announcement, VCP also said that if the BorsodChem sale is completed by November of this year, VCP subsidiary CEOG will purchase BorsodChem's 15.4% direct holding in peer chemical company TVK Rt at a price of Ft 5,503 per share.
In addition, BorsodChem is seeking a secondary listing of its stocks on the WSE. Although no date has been given, the company hopes the listing will go through in time for the share sale.
Commenting on the potential Polish listing, Pletser said that if the listing fails to be completed within the time frame of the sale, the share price could be affected.
"While it's a good time to sell, the sale seems very rushed," he said. "If it did happen by the end of October, then Polish investment funds can buy into the company freely. They are restricted on the levels of investment in non-WSE-listed companies. Conversely, if the listing does not go through quickly, this could have a negative impact on stock price."

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CONSTRUCTION

HUF 500m contracts for KEESZ

One of the biggest Hungarian construction industry companies, KESZ Kft, has signed two major contracts in the region, worth nearly HUF 500m, New Europe reported recently. 
The automotive producer Peugeot has entrusted KESZ with the partial planning, production and installation of the steel structure of its new painting site in Trnava, located in Serbia and Montenegro. At the same time, KESZ got a contract from the Metro chain for the construction of their first store in Serbia and Montenegro. KESZ is estimating a total 2004 income of over HUF 40bn.

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CREDIT RATINGS

Moody's may upgrade Erste rating

Following the merger of Hungary's Postabank (rated A2/P-1/E+) into Erste Bank Hungary Rt (previously unrated), Moody's Investors Service announced it has withdrawn all ratings of Postabank and assigned them to Erste Bank Hungary Rt, New Europe reported recently. 
The E+ financial strength rating was placed on review for possible upgrade. Moody's said that the A2/P-1 ratings - standing for long-term bank deposits and short-term bank deposits, respectively - are based on expected support from the majority owner of Erste Bank Hungary, Austria's Erste Bank der oesterre-ichischen Sparkassen AG (A1/P-1/B-). The review of the E+ financial strength rating will focus on the combined entity's improving financial fundamentals and market position as well as the process of integrating the two banks, Moody's said. The merger was completed on August 31st; the combined total assets of the two entities approached HUF1 trillion at the end of the first half of this year. Fellow rating agency Fitch Ratings soon after announced that it assigned Erste Bank Hungary a Support rating of "1," and at the same time affirmed Postabank's Support rating at "1" and simultaneously withdrew it. Fitch said the Support rating assigned to Erste Bank Hungary reflects what is viewed as an extremely high probability of support from its Austrian parent in case of need.

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FOOD & DRINK

Podravka's Hungarian plant closes

Croatian food and food ingredients manufacturer Podravka International Kft will shut down its plant in Mohacs, south Hungary and move production back to Croatia, the Mohacs municipality confirmed, New Europe reported recently. 
Podravka's Hungarian subsidiary Podravka International Kft produced food seasoning brand Vegeta in Mohacs for 10 years. The decision to close the plant and to layoff its 56 workers is in line with a reorganisation and cost-saving programme in scope of which the parent company closes down plants in the region.

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INFORMATION TECHNOLOGY

Novell scores 3-year IT network deal

IT network provider Novell Hungary Kft has sealed a Ft 1bn (€4.04m) contract to provide the National Judicial Council Office (OITH) with a computer network and IT-based administration system, Budapest Business Journal reported recently. 
The contract - which will create the largest Novell system operating in Hungary - was signed for a period of 3 years.
"This project will equip judges around the country with EU-conform and secure innovative IT infrastructure," said Tamas Szittya, managing director of Novell Hungary.
The system is to be installed at 158 OITH offices throughout the country, connecting 7,350 users, and will be paid for from EU Phare funds, according to Janos Horvath, head of the OITH's IT department.
"The OITH plans to create a secure and innovative IT infrastructure that meets EU requirements, and a compatible portfolio.

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MINERALS & METALS

Dunaferr privatisation reaches completion

The Donbass Industrial Association has gained a 79.48% stake in Dunaferr Rt, following the recent completion of a privatisation process that was launched last September, Dunaferr announced in a press release, Budapest Business Journal reported recently.
The buyer is a consortium of Ukrainian steel firm Donbass Inc, Russian metallurgy firm, Altchevsky Metallurgy Inc, Swiss firm, Duferco International Trading Co, and Liechtenstein-registered project company, Kundax AG.
The other members of the consortium selected Kundax to buy 1,540,882 shares with face value of Ft 5,091 each.
The consortium spent almost Ft 100bn (roughly €400m) on the deal, including a Ft 17.3bn capital increase and a consolidation of the loan portfolio. The contract was signed by Miklos Kamaras, general manager of the State Privatisation and Holding Rt (APV), Sergei Taruta, President of the Donbass Industrial Association, and Peter Honig, president and general manager of Dunaferr.
Quoted in the press release, Kamaras said that Dunaferr has found a strategic partner in Donbass, which will take responsibility for the company in the long run. Donbass undertook that it will not decrease the number of employees at Dunaferr in the next 5 years.
Also in the press release, Taruta said this complex privatisation process will result in a more efficient Dunaferr. Taruta added that shareholders, employees, the town and the region will benefit from Donbass' takeover.
"Now, Dunaferr has the chance to make a profit from the steel industry's [boom] as a member of a leading producing and trading group in the industry," he said.
Donbass Industrial Association is a leading metallurgy group in Ukraine and other countries of the Commonwealth of Independent States (CIS). According to Dunaferr's press release, the total revenue of the group, excluding affiliates, was $1.74bn in 2003, which means an 85% increase over 2002. The gross profit of the group hiked to $78.9m in 2003, over the $39m of 2002.
The net profit of companies in the Donbass Industrial Association was $26m in 2003. Last year, Dunaferr reached Ft 364bn in total revenue, while its gross profit was Ft 193m as opposed to the projected Ft 2.6bn loss. In the first eight months of this year, Dunaferr has reached a consolidated revenue of Ft 230bn in 2004.
Dunaferr (formerly Dunai Vasmu) was founded in 1950 and currently employs 8,400 people. The company produces 1,330 kilotons of iron, 1,642 kilotons of converter steel and 1,404 kilotons of hot rolled, ready-made products. The most significant buyers of Dunaferr's products are German and Italian firms. In all, 70% of Dunaferr's exports are realised in EU countries.

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PHARMACEUTICALS

Richter sale completed successfully

The successful sale of the state's 25% stake in Hungary's largest pharmaceutical producer Richter - in the form of issuing bonds convertible to Richter shares after 5 years - "will provide substantial help for Richter to implement its strategy," finance minister, Tibor Draskovics said, New Europe reported recently
A day before privatisation agency APV issued convertible bonds with face value of €100,000 in the total value of €640m to institutional investors, representing its entire 25% stake in Richter, with each share valued at a 54% premium over the market price. Following the completion of the issue, the first of its kind in Hungary, the bonds will be listed on the Luxembourg Stock Exchange. The high premium achieved during the issue - which reflects the expected increase in the share price over the next 5 years - "signals that investors are confident in Richter and the Hungarian economy," Draskovics said.
APV CEO, Miklos Kamaras, said the premium is considered "outstanding" in international comparison. Elaborating on the details of the transaction, Draskovics said proceeds will be used to reduce government borrowing or repay debt ahead of maturity. Kamaras added that as a result of the successful transaction, APV has raised its 2004 gross revenue target from HUF 370bn to HUF 415-420bn. Under the construction, investors may convert their bonds to Richter shares upon maturity on September 28th, 2009 if the share price increases by more than 54% in the 5-year period. If the share price increases by less than 54%, APV will have to buy back the bonds upon maturity and pay a yield of 3.0% on the Euro-denominated bonds, on top of a 1.0% annual coupon.
However, Kamaras revealed that come 2009, the state may opt to hold on to its Richter shares and pay their cash equivalent at prevailing market prices to bondholders if it so chooses. This will allow the government in power at that time to enact its own strategy regarding the 25% Richter stake, which may involve keeping it or selling it to a strategic investor - although the latter option has been consistently rejected by Richter, which sees its lack of a dominant strategic shareholder as the key to its successful performance.
The APV CEO also noted that the construction will be practically self-financing, as the state's interest and yield obligations on the bonds will be more than covered by dividends received from Richter (APV will retain its ownership and voting rights in the company until 2009). As part of the transaction, Richter confirmed that it will continue with its long-standing policy of paying out 25% of its earnings as dividend.
Representing co-organiser Concorde Securities, Gyorgy Jaksity said that a total of 119 investors subscribed bonds.
The largest amount subscribed was €20m, with nearly a dozen investors subscribing such an amount. Jaksity also noted that secondary trading of the bonds has already started on the Luxembourg bourse, with deals struck conditioned on the settlement of the transaction. The market price of the bond has already risen slightly, Jaksity noted.

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TELECOMMUNICATIONS

GTS-Datanet offers new services

Alternative telecom provider GTS-Datanet announced on September 14th that it is entering the market of carrier pre-selection for local fixed-line telecom calls, adding to its already existing services offering long-distance and international calls, New Europe reported. 
GTS-Datanet launched the new packages as of September 15th, the date when concession operators were obliged to open up their markets for local calls as well. In general, two types of carrier selection are available: pre-selection, where the customer defines in advance the provider to carry his calls, or call-by-call selection, when the customer selects a carrier for each call by entering a four-digit pre-dial code.

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TOURISM

Budget travellers boost tourism figures

More foreign tourists visited Hungary in the first 7 months of the year than in the same period of 2003, while domestic tourism fell, a report recently published by the Central Statistics Office (KSH) showed. Meanwhile, hotels registered better income figures, the report said, the Budapest Business Journal reported.
The number of foreigners visiting Hungary increased by 9% year-on-year, while the number of guest nights they spent in the country rose by 3%, the report stated. It also said that the overall growth was almost exclusively in Budapest, while the number of foreign tourists slumped in almost every other region.
Observers said low-cost airlines played a key role in the improving figures.
"At present, low-cost carriers only fly to Budapest. No wonder that's where the growth presents itself," said Gabriella Molnar, president of the Association of Hungarian Travel Agents and Tour Operators (MUISz).
Molnar stressed that there is no direct correlation between improving tourism figures and improving sales for travel agencies.
"Low-cost airlines usually do business directly with their clients, without involving agencies, who therefore cannot benefit from the increased interest. In fact, the total income of agencies dropped (in the period)," Molnar said.
The first 3 no-frills airlines appeared in Hungary last year, while in 2004 another 4 have followed. The eighth low-cost carrier is expected to be the Irish Aer Lingus Group Plc, which, is to launch its service between Budapest and Dublin in November.
The KSH report also stated that, within Budapest, the growth was most apparent in the case of 4 and 5-star hotels.
"At first, there might seem an anomaly in the concept of growth generated by low-cost airlines presenting itself in high-class hotels," commented Marius Gomola, hotel and leisure project development partner at Horwath Consulting Kft. "But in fact, many of the clients of no-frills airlines are business people, whose companies are happy to save 50%-75% on a plane ticket. Contrary to predictions before May 1st, EU accession has brought a remarkable expansion in the segment of business clients."

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TRANSPORT

New M7 and M70 sections open

A 9km section of the M7 motorway from Becsehely to Letenye on the Croatian border was opened to traffic recently. The M70, a further 19km of lower-level highway between Letenye and Tornyszentmiklos on the Slovenian border to the north, was inaugurated at the same time. Various phases of the M7 have been under construction since the early 1960s. The conceived 2X2 lane motorway running from Budapest to the Croatian border is expected to be fully operational by 2007, New Europe reported.

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