Books on Hungary
% of GDP
Update No: 088 - (27/07/04)
Premier Medgyessy resigns
Prime Minister Peter Medgyessy resigned on August 19th after a crucial member of
Hungary's governing coalition said it no longer believed he was the right person
to run the government. The Alliance of Free Democrats, a junior partner in a
coalition with the governing Socialist Party, opposed Medgyessy after he
dismissed Economics Minister Istvan Csillag on August 18th.
The Free Democrats, who hold four ministerial positions in the government and 20
seats in the 386-seat Parliament, proposed Csillag as Medgyessy's replacement.
Despite its relatively small parliamentary representation, the party is an
essential part of the coalition, which holds only a 10 seat-majority over the
Medgyessy's government had been in profound turmoil for weeks amid disagreement
over how to best govern Hungary as it adjusts to European Union membership.
Hungary joined the EU in May, and disagreements have emerged over the
government's priorities in the midst of crisis over a budget deficit that is
among the largest in Europe.
Millionaire businessman succeeds; Blair look-alike
The Free Democrats, without whom the ruling Socialist Party would not have a
majority in parliament, said either former Sports Minister Ferenc Gyurcsany or
Deputy Prime Minister Peter Kiss would be acceptable replacements for Medgyessy.
In fact the 43 year-old millionaire, the charismatic Ferenc Gyurcsány is in
line to become Hungary's next prime minister. This was decided at a Hungarian
Socialist Party congress on 25 August, convened to find a replacement for
Medgyessy. Gyurcsány secured 453 out of 623 votes cast by the delegates.
The new candidate, Ferenc Gyurcsány, has often been compared to the British
Prime Minister Tony Blair for his charisma and casual style. Gyurcsány, an
economist by training, became an advisor to Medgyessy in 2002 after building a
business empire which made him one of the 100 richest Hungarians. He was
appointed sports minister in 2003.
Having secured a victory over Péter Kiss, the Deputy Prime Minister, Gyurcsány
said he would win the next elections in 2006 to secure two consecutive terms for
the Hungarian Socialist Party - something which no Hungarian government has
managed to achieve since 1989.
The Hungarian parliament is expected to approve Gyurcsány as the country's next
prime minister on 6 September. The Free Democrats have said that they fully
support Gyurcsány's candidature. Their 20 votes in Hungary's legislature are
crucial as they would help the new premier secure a narrow majority.
The popularity of the Socialist Party has reached all-time lows since its weaker
than expected performance at the elections for the European Parliament.
The announcement is an important development because it makes the prospect of
early elections less likely. Gyurcsany is seen as the more charismatic of the
two contenders, but some in the party fear he may yet alienate poorer voters
because of his personal wealth. Kiss appeals to the left wing of the party and
would not have been favoured by financial markets.
Government committed to euro adoption no later than 2010
The Hungarian government is committed to introducing the euro no later than
2010, the then premier, Peter Medgyessy, said in an interview with the Financial
Times, before his resignation. It is unlikely to make any immediate difference
to government policy on the issue.
At the same time, Medgyessy also said he "more or less" agrees that
"meeting the requirements for joining the euro is more important than
joining the euro, because if the economy can meet those challenges, then we have
competitiveness and strength." The premier added that "it wouldn't be
a catastrophe if we had to postpone our plan to adopt the euro."
Medgyessy also recalled that Hungary's budget deficit will decline from over 9%
in 2002 to under 5% of GDP this year, and will be further reduced by half a
percentage point each year to 3% by 2007. However, the market "doesn't yet
believe" that the budget deficit will fall to the official target of 4.6%
of GDP this year, adds the FT's commentary.
The FT's columnist also argues that new EU member states may be consciously
delaying the adoption of the euro, choosing higher growth instead of austerity
measures needed to meet deficit, inflation, interest rate and debt level
requirements for euro-zone accession.
The government submitted its convergence program to the European Commission in
May this year, and named 2010 as a "certain and realistic" target date
for the introduction of the euro - this implies meeting the Maastricht criteria
in 2008. "Our goal is not a fast, but a secure eurozone entry,"
finance minister Tibor Draskovics said at the time.
Hungary was once a magnet for foreign direct investment (FDI) in central
Europe, of which it had $20bn by the late 1990s, barely a decade after the
collapse of communism. It is now adjusting to having "a revolving-door
economy," as one wit puts it, " with companies moving in and out of
the country by the week."
In a typical month in June, Philip Morris closed a cigarette factory, Norwegian
company Norsk Hyrdro moved part of its car parts production to Budapest, the
favourite venue for FDI in Hungary, from Britain and Siemens backed off threats
of moving the assembly of mobile and cordless phones from Germany to Hungary.
Beyond the reality of rapid global capital flows, analysts say the abrupt moves
are a sign of Hungary's changing economy from one that attracted firms looking
for cheap labour to another that offers a skilled, but still affordable,
"Hungary is on the edge of two eras," Orsolya Nyeste, an analyst with
Erste Bank in Budapest, told AFP. "The companies that came here only for
cheap labour are leaving or have already left for cheaper places like Romania or
China. The challenge for Hungary now is to attract companies looking for skilled
labour and to make these firms stay," she added.
German engineering and electronics giant Siemens had threatened to off-shore
some 2,000 jobs from Germany to Hungary, but backed off this month after German
workers agreed to work longer hours without a corresponding pay increase. A
German worker costs employers 26.34 euros (32 dollars) per hour, nearly seven
times the 3.83 euros companies pay for an hour of Hungarian labour, according to
a study in 2000 from the Hungarian central statistics bureau.
"Economic competition is a fluid process and motivates companies to move to
cheaper countries," said Peter Biro, strategic and communications director
at Siemens Hungary.
Biro emphasized, however, that Siemens was not only looking for cheap labour. He
said that of the company's 2,200 workers in Hungary, "a quarter are
software developers and more than half have a technical degree or university
Still, Hungary is also learning to take the punches of the global economy along
with its profits.
Capital outflow jumped from $0.3 billion in 2002 to $1.6 billion last year,
while incoming investments dropped from $3.9 billion in 2001 to $2.5 billion in
2003, a still sizeable sum, according to a report last week by the Organisation
for Economic Coooperation and Development. Net figures are still positive,
rather belying the idea of a crisis.Hungary's position within the world economy
is maturing; that is all.
While government officials here say the outflow is now also due to Hungarian
companies investing abroad, another part is caused by foreign companies slimming
down their operations or moving out for good.
Philip Morris has closed its cigarette factory in east Hungary leaving 348 out
of work. The company said the factory was too small to be economically viable.
Singapore-based Flextronics has cut 400 jobs at its plant in western Hungary,
citing falling orders. In 2002, the company moved nearly 1,000 jobs from Hungary
to China reportedly to cut costs in the manufacturing of the console for
Microsoft's Xbox video game system.
That move coincided with the election of Hungarian Prime Minister Peter
Medgyessy who promised -- and delivered -- a 50 per cent wage increase for most
public-sector employees which in turn trickled-down to the private sector.
Government encourages new FDI with tax breaks
The government, however, is doing its best to make new firms set up shop. As
of this year, it lowered corporate tax rates from 18 to 16 percent and eased
eligibility for an up to 80 percent exemption on the tax. Whereas before a
company needed to invest 10 billion forint (39.8 million euros, 48.5 million
dollars) and employ 500 employees to receive the tax-break, the threshold is now
three billion forint with an employment of 100. The tax break, which is even
more attractive for investments in less developed regions of Hungary, was also
extended from five to 10 years.
Last month, Norwegian company Norsk Hydro moved part of its auto parts
production from Leeds in England to the western Hungarian town of Gyor. The
move, which would lead to about 100 new jobs in Hungary, would put Norsk Hydro
above the employment threshold for the tax breaks, a company official said.
"We needed to boost the number of employees to over 600 by 2005 to receive
the tax breaks," Gabor Mersich, chief financial officer of Norsk Hydro's
Hungarian affiliate, told AFP."With another 100 employees we'll be over the
top," he said.
Airline Wizz Air to launch 14 new flights
Low-cost Wizz Airline will launch 14 new flights from September 15th, bringing
the total number of its weekly flights to 56, Wizz Air CEO, Jozsef Varadi, said
recently, MTI reported.
The airline will also offer 100,000 tickets on its flights for 1 Euro apiece as
part of a special offer, Varadi said. The one-Euro tickets will be available for
flights between October 31st and December 31, but seats must have been booked
between July 19th and August 31st.
Wizz Air started selling tickets for two more flights in its winter schedule,
Milan and Copenhagen recently. Scheduled seasonal services to Athens will be put
on hold from September 15th and to Barcelona from October 31st.
Wizz Air launched its first scheduled flights in May and has carried 50,000
passengers since then. Around 83% of flights have been on time and the airline's
load factor has been a better-than-expected 50%, Varadi said, adding that the
load factor has since risen to over 65%. Wizz Air's base airports are in
Budapest and Katowice, but the Warsaw and Gdansk airports will also become base
airports for the airline as of mid-September. Wizz Air currently operates four
Airbus 320 aircraft. They are due to take delivery of another 5, after which the
management will decide whether to continue building the fleet in Budapest,
Wizz Air currently employs 200 people, Varadi said, adding that the airline's
pilots were "over-qualified" to ensure the safety of the services.
Varadi said the airline has met all requirements for a planned 40m Euro capital
injection at the end of the summer. Indigo partners announced in the middle of
May that it intended to provide 20m Euro of the capital injection, however,
Varadi declined to name the other parties involved. The move will make Wizz Air
the richest discount airline in Europe, Varadi said, adding that this was
important, considering that capital is the key to survival on the market for
low-cost airlines. Wizz Air has registered capital of over 7m Euro.
Wizz Air's operating costs are 25-33% lower than those of its closest rival and
are equal to those of Ryanair. Varadi said there will be dramatic changes on the
market in the coming months as both low-cost and traditional airlines struggle
with their competitors on their saturated markets.
Aer Lingus to fly Dublin to Budapest
Aer Lingus has announced its intention to fly the Budapest-Dublin route,
increasing the number of low-cost airlines serving the Hungarian market to
seven, Budapest Business Journal reported recently.
The Irish airline will launch its flight in its winter schedule, at the end of
October, together with three other new routes. This will bring the number of new
routes it has introduced this year to 17.
"The introduction of these new routes reaf-firms Aer Lingus' commitment to
providing direct, low-fares access for Irish customers to new destinations, as
well as providing real growth opportunities in inbound tourism from emerging
markets," the company's chief executive, Willie Walsh, said in a press
"We have more than doubled our network in less than three years, and all
our new routes are performing well," he added.
Introductory fares, excluding taxes, start from €74 on the Budapest route.
Flights to Budapest will operate four days a week, on Monday, Wednesday, Friday
Malev to be sold end-2004
Hungary's government decided on the privatisation of Hungarian Airlines Malev at
its meeting recently, with the transaction expected to be closed before the end
of the year, government spokesperson, Zoltan J Gal, said after a cabinet
meeting, Interfax News Agency reported.
Privatisation agency APV will offer Malev for sale in a public, one-round
tender, in which consortiums may also participate. APV will offer the state's
99.9% Malev stake for sale. The applicants submitting their proposals must also
elaborate on how they plan to maintain Malev's "national airline"
Banking sector sees profits soar 33.8% in the first quarter
The Hungarian banking sector enjoyed a profitable first quarter, according to an
in-depth report on Hungary's financial scene released recently by the State
Financial Institutions Supervision (PszAF), the Budapest Business Journal
The report noted that the banking sector, which employs over 26,000 people in
all, recorded combined pre-tax profits of Ft 72.9bn (€290m) in the first
quarter of 2004, up a substantial 33.8% over the corresponding period of 2003.
The report also stated that the sector's combined total assets rose 23.6%
year-on-year in the first quarter, to Ft 13,148bn. Total assets rose 2.2% during
the first three months.
Combined loans came to Ft 8,350bn, up 28.3% year-on-year, and up 2.8% in the
first quarter alone.
Total deposits in the sector came to Ft 6,729bn, unchanged from December 2003,
but up 14% on a year-on-year basis.
Banks continued to rely heavily on domestic deposits, although the share of
these deposits within the total has fallen from 60% at the end of 2002, to 52.3%
at the end of 2003, to 51.2% at the end of March 2004.
On the downside, the PszAF noted that banks' and other credit institutions'
outlays - notabley lending to SMEs - carried a higher risk, yet had narrower
margins than other loans.
In addition, the industry watchdog predicted falling demand for vehicle
financing, as well as for home loans and related insurance products, in the
remainder of the year.
The PSzAF report stated that market concentration shows no signs of abating,
with the ten largest banks accounting for 75% of total assets, 83% of loans and
86.3% of deposits.
Commenting on the report, Zoltan Partl, an equity analyst covering the banking
sector for K&H Equities Rt, said there was little in the report that
surprised him. Looking ahead to the second quarter results and beyond, he
predicted that by and large the trends noted by the watchdog would continue.
Concerning housing loans, Partl said that volume seemed to be slowing, as
expected, mainly owing to a combination of higher interest rates and the cut in
"The volume is slowing, but growth in Q4 2003 ad Q1 2004 was very high, so
there's a natural levelling-off occurring," he noted. He added that he
expects housing loans to continue to be one of the main drivers of banks
"Even though the rate of growth has slowed, I still expect that, as
interest rates come down, volume will pick up in Q4 and beyond," he
Partl observed that while any pick-up in the economy could lead to growth in the
corporate banking sector, margins are still very low and competition remains
"For this reason, corporate banking provides a lower contribution to the
overall bottom line, and retail is still the driver of bank profits across the
sector," he said.
Partl noted that the only major change among the trends the PSzAF pinpointed was
the rise of FX-denominated loans.
"These constructions have grown in popularity this year, and I think we
will see this volume growth pushing commercial banks' profits, rather than
growth in forint-denominated loans," he said. "Of the major commercial
banks, OTP (Bank Rt) and FHB (Rt) launched their foreign currency-based home
loans very late in the quarter, and as a result we may see some of their market
share slipping, though not to a significant degree."
Regarding OTP Bank, the country's largest bank, Partl said he expects a very
good second quarter, not least as OTP's Bulgarian acquisition, DSK Bank,
reported better than expected first-half results.
"DSK's profit was 10% above my forecast, and I calculate that a 10% rise in
DSK's profit adds approximately 1% to the OTP Group's profit," he said.
Partl added that a large-scale reallocation of funds from within Central-Eastern
Europe is pushing OTP's stock price up ahead of the Q2 results.
"Polish banks have been excessively overvalued, and institutional investors
have been reallocating funds to Hungary, which in reality means to OTP, and to a
lesser degree FHB," he said.
MOL to sell 75% of gas business
MOL Hungarian Oil and Gas Company only intends to sell a 75% stake in its
natural gas subsidiaries and retain 25%, executive chairman, Zsolt Hernadi, said
in a recent interview, New Europe reported.
Negotiations with potential investors could be completed before the end of the
year, he added. The data room for the gas subsidiaries - storage firm MOL
Foldgaztarolo, trading arm MOL Foldgazellato and gas shipment and system
operator MOL Foldgazszallito was closed recently, while potential investors were
expected to present their offers in mid- to late August, CEO Gyorgy Mosonyi
Earlier, MOL said it was seeking to sell up to a 100% stake in MOL Foldgaztarolo
and MOL Foldgazellato, while the company must maintain at least 25% in MOL
Foldgazszallito. Interested companies reportedly include Russia's Gazprom,
Germany's Ruhrgas, Gaz de France, Austria's OMV and Ukraine's JSC Naftogaz
Ukrainy. MOL plans to use proceeds to increase its stake in Croatia's INA, build
a greenfield filling station network in Serbia, or develop its retail network in
Slovakia, among other goals.
EU clears €754m rural plan for Hungary
The European Union's Committee on Agricultural Structures (STAR) has given the
go-ahead for the €754.14m Hungarian rural development plan, The Budapest Sun
The plan earmarks the sum for Hungarian rural developments between 2004 and
2006. Nearly 80% (€602.3m) will arrive from the EU and the remainder from the
Hungarian central budget. The development plan includes a wide range of
instruments required to boost the income and earnings of the rural Hungarian
population, develop and keep workplaces and promotes environmental friendly
agricultural development projects. Other goals include the best use of
agricultural land and landscape management. One of the key aims is to prompt
farmers to start subsistence farming to increase economic competitiveness and
help develop "producer clusters."
The rural development programme pays special attention to the underdeveloped
rural regions, offering compensation subsidies and guarantees to help sustain
competitiveness in rural towns.
It also calls on the rural population to meet EU standards in the areas of
animal health care and environmental protection, and entails an increase in
forest areas to develop and improve the quality and quantity of the environment.
The programme calls for quality production in the agricultural sector and the
regional development plan also contains a clause to allow farmers retirement at
the age of 55, in a bid to encourage the development of a new generation of
farmers. The programme in Hungary will be carried out and supervised by the
ministry of agriculture and rural development (FVM).
MINERALS & METALS
Dunaferr to buy DAM Steel assets
The assets of bankrupt steel manufacturer DAM Steel Rt, based in Diosgyor,
northeast Hungary, are to be bought by steel company Dunaferr Rt, according to
an announcement by DAM Steel's liquidator, Matraholding Rt.
After three unsuccessful attempts to sell DAM's assets in a single package
valued at Ft 5.3bn Matraholding finally offered the assets piecemeal. The offer
values DAM Steel's real estate at Ft 2bn and its machinery at Ft 1.75bn, along
with Ft 200m for a 66.6% stake in DAM Steel's power supplier, DAM Energy Kft.
The price of the receivables was set at Ft 830m, and inventory at Ft 540m.
Four companies made bids in the latest offer. Only Dunaferr's and Ozd
Steelworks' bids were found valid. Matraholding CEO Janos Kovacs declined to
reveal the sale price, but news agency MTI reported that Dunaferr paid less than
half of the asking price in exchange for a pledge to keep 700 jobs.
"We hope that the future of metallurgy in Diosgyor, which has been insecure
for more than 10 years, will be arranged in the long term," Kovacs told
reporters after the announcement of the successful tender. "We are also
satisfied that the workers of the company can join a world-standard
Zsolt Varkonyi, Dunaferr's PR director, said the financial backing of Dunaferr's
Ukrainian majority owner, Industrial Union of Donbass, facilitated the purchase.
Earlier in 2004, Dunaferr, which produces 80% of Hungary's steel, was privatised
for €1.8bn to a consortium of Donbass and Swiss steel firm Duferco SA Dunaferr.
Americans, Russians and IAEA help Paks NNP
Jozsef Ronaky, director general of the Hungarian atomic energy office (OAH),
said US and Russian nuclear safety authorities, in cooperation with the
International Atomic Energy Agency (IAEA), are helping Hungary to prepare the
operational licences for clean-up work at the nation's sole nuclear power plant,
Paksi Atomeromu Rt (Paks), The Budapest Sun reported recently.
Ronaky added that the aim of their visit is to prevent any repetition of last
year's technical glitch, which occurred at the rod cleaning tank of the plant's
470MW number-2 block on April 10th, 2003. He explained that the actual removal
of 30 bundles of damaged fuel roads from block-2 could start in the spring of
2005. At the same time Paks postponed the resumption of its number-2 block,
which was due to get up and running in August.
Hungarian daily Magyar Nemzet, citing an unnamed source, reported that the
generating block will remain offline because the national power wholesaler MVM
Rt had signed a long-term agreement for power imports. The paper said that MVM's
contract contains a clause whereby it would still have to pay 75% of the ordered
volume despite the fact that it may not call the order. However, Agoston Tringer,
spokesman for MVM, said that its business activities have no connection to any
delay of re-booting block-2 at Paks.
On April 10th, 2003, radioactive emissions were recorded at block-2 during
maintenance work. However, the plant announced that this has caused no immediate
effect on the environment or human lives.
Matav makes regional moves
Hungary's leading telecom, Matav Rt, may acquire Bulgaria's top mobile operator,
MobilTel EAD, the Bulgarian daily, Dnevnik, reported recently.
Matav, owned by Germany's Deutsche Telekom, has stated a strategy of seeking
expansion in the region. Currently, its sole foreign investment is Macedonia's
MobilTel is currently owned by a group of seven financial investors led by ABN
Amro Holding NV and Citigroup Inc. The seven paid US$1.49bn for MobiTel on May
26th. They may decide to sell the mobile company to a "large Western
company" by the end of the year, Dnevnik said. MobiTel has more than 2.7m
customers, and reported sales of US$535m in 2003.
Meanwhile, Matav is awaiting details of the privatisation of Telecom Montenegro,
expected later this year.
In another move promoting Matav's regional presence, the telecom signed a deal
on July 15th with T-Systems International, an IT specialist also owned by
Deutsche Telekom. They agreed to set up international carrier cooperation.
In addition, T-Systems Hungary Kft, the local subsidiary of T-Systems
International reached an agreement with Matav on a strategic partnership. The
deal means Matav acquiring a 49% stake in T-Systems Hungary, paying Ft 1.4bn
plus a Ft 2bn capital raise.
"Under the agreement, points of presence will be established in Bulgaria,
Romania, Greece, Moldova, Serbia, Montenegro and Ukraine in the upcoming
years," said a statement from Matav. "The aim is for the companies to
cooperate in IT and telecommunications."
Matav is believed to be planning to spend up to €1bn on expansion into
Southeast Europe, according to German press reports.
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