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Books on Hungary
REPUBLICAN REFERENCE
Area (sq.km)
93,030
Population
10,032,375
Capital
Budapest
Currency
Forint
President
Ferenc Madl
Private sector
% of GDP
60%
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Update No: 098 - (01/07/05)
The EU debacle and its fall-out
The 'no' votes in France and the Netherlands have certainly unsettled the
Hungarians, as everyone else in the EU. Has the movement towards closer
integration stalled?
Their negotiating position is not very strong, after Budapest was ticked off by
Brussels this year for poor public finances. They were given a taste of EU
membership this year by farmers, who descended on Budapest to protest at late
payments of agricultural subsidies by government.
After over a year in the European Union (EU), Hungary's membership remains a
vexed issue in its political life. Farmers are in principle prime beneficiaries
from the CAP. In practice it is working out differently so far.
Agriculture minister sacked
Hungarian Prime Minister Ferenc Gyurcsany in late April announced that he had
sacked his agriculture minister, one week after firing the country's finance
minister, an obvious response to the censure of Brussels that the budget deficit
at 4.5% of GDP was too high. Gyurcsany is openly cleaning house ahead of
elections in 2006, having fired his finance minister, Tibor Draskovics, on April
18th because his fiscal reform programme was not far-reaching enough. He
replaced Draskovics with Janos Veres, who is seen as capable of driving through
unpopular reforms.
As for the vital agriculture ministry, "I have asked Imre Nemeth to resign
and at the same time asked Jozsef Graf to take up the post of agriculture
minister," the prime minister told a press conference. Gyurcsany indicated
that Nemeth's departure was the result of a debacle over EU funds in February
that saw farmers stage two weeks of protests in Budapest. The farmers accused
the minister of failing to ensure that the funds reached them.
Gyurcsany said he had asked Graf, a Socialist lawmaker, to ensure a proper
handling of "European and national funds" and "a clearer and
better cooperation with producers."
The prime minister added that with a view to Hungary's next general elections in
April 2006, "the new agriculture minister should change the leadership, the
organisation and the aims of the ministry. Over the next year we will need a
minister who operates more like a manager rather than a politician."
Graf, 58, is one of the founding members of the Socialists, who came to power in
2002, and said that he enjoyed "excellent relations with different sectors
of the agriculture community."
The election too close to call
Gyurcsany has hinted that further cabinet changes were not excluded in order to
implement his vision of "a hundred steps" that need to be taken to
govern Hungary more efficiently. "In order to implement our policy of
'hundred steps', some people need to be replaced," he told journalists.
According to a recent opinion poll, Gyurcsany's alliance of the Socialists and
the Liberals have the support of 47 percent of Hungarian voters, and the main
opposition Fidesz, 48 percent.
The right-wing Fidesz commented that Nemeth's dismissal was "an admission
by the government that its agriculture policy had failed." The
cut-and-thrust of politics is clearly hotting up in Hungary.
GDP accelerates 3% in January-March 2005
Hungary's economy is in fact in not such a bad shape as all that. Its GDP rose
2.9% in the first quarter of 2005, according to preliminary data released by the
Central Statistical Office (KSH) recently, cited by the Interfax News Agency.
The figure is slightly below consensus expectations of 2.98-3.04% growth (Napi
Gazdasag, Reuters data). The first quarter growth rate of GDP compares to the
4.1% recorded in the last quarter of 2004 as well as for the year as a whole,
the data showed.
According to seasonally adjusted figures, GDP grew 0.7% in the first quarter
compared to the previous quarter. Adjusted for the leap day in the base period,
GDP growth in the first quarter was 3.5%, the KSH was quoted as saying. Value
added in the production sectors was up 1.5% on the year, while services showed
3.6% growth in the first quarter.
The KSH will publish revised GDP growth figures for individual quarters of 2003
as well as 2004, following the release of revised aggregate yearly figures
earlier in May. The revised data also include adjustments for calendar effects
and the leap day in early 2004, which affected first quarter GDP growth in 2004
as well as this year. According to the revised figures, GDP growth last year was
4.2% unadjusted and 4.1% when adjusted for calendar effects, as opposed to the
originally estimated 3.8%.
Blue chips produce smaller profits
Hungary's listed companies posted modest results in first quarter of 2005,
with the growth of their profits and revenues slowing, HVG reported. While oil
and gas company, MOL Rt, remained the strongest performer on the market, market
leader, OTP Bank Rt, lagged behind in the three-month period.
Companies listed on the 1 (BET) made a total of HUF 1,067bn in revenues, 10% up
from a year ago, and HUF 155bn in profits in the first quarter, 16.5% up from
the first quarter in 2004. A total of 13 companies managed to increase their
revenues by a larger extent than the rate of inflation (3.5%), while only 11
boosted profits at a rate exceeding inflation. MOL, chemicals maker TVK Rt, and
Land Credit and Mortgage Bank Rt. (FHB) proved the strongest players on the
market. MOL mostly profited from high crude oil prices and growing margins at
refineries. Crude oil prices in the first quarter were 50% higher than a year
earlier, and 31% higher than prices at the end of 2004. However, MOL's sales
revenues in Hungary and Slovakia fell due to a falling demand for fuels.
Slovnaft, MOL's Slovakian subsidiary, lost some market share after it closed
filling stations that did not make a profit.
S&P cuts sovereign credit ratings
Standard & Poor's (S&P) recently downgraded its long- and short-term
local currency sovereign credit ratings on Hungary from A and A-1 to A- and A-2,
respectively. The move was carried out due to Hungary's weakened fiscal outlook
and poor prospects for medium-term fiscal consolidation. But for foreign
currency ratings on the sovereign the ratings agency affirmed the A- for
long-term and A-1 for short-term. S&P said the outlook is stable.
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AUTOMOBILES
Bridgestone chooses Hungary for new tyre plant location
Bridgestone Corporation recently announced that its wholly owned subsidiary
Bridgestone Europe NV/SA will build a tyre plant in Hungary, a company statement
read. Construction of the new plant, its location near Tatabanya, will begin in
2006, Bridgestone said, adding that production should get under way in 2008.
Bridgestone's plans call for production capacity at the plant to reach about
8,000 tyres a day in the first half of 2009. The company has earmarked 190m Euro
for investment in the project, the statement read, New Europe reported.
The plant will produce radial tyres for passenger cars and light trucks, and it
will be the first European installation of Bridgestone's revolutionary new BIRD
production system. BIRD (Bridgestone Innovative and Rational Development) is the
first tyre production system that automates the entire manufacturing sequence
from the processing of materials to the inspection of the finished tyres.
Europe is considered to be one of the most advanced markets for the automotive
industry in terms of the high-speed driving on the autobahn (German motorway),
high demand for safety and environment, and consumers' awareness of designs, the
company noted.
The Hungarian plant will serve the growing demand for high-performance and large
rim size tyres for passenger cars in Europe, as well as increasing the group's
overall supply capacity there, it added.
When the Hungarian plant begins operation, the Bridgestone Group will have 51
tyre plants in 24 nations. That includes three plants already announced in
Mexico, Brazil and china.
The Hungarian plant will be the second tyre plant in central Europe for the
Bridgestone Group, which produces tyres in Poznan, Poland.
Continental Teves clinches contracts
Lukacs Szalontay said Continental Teves Hungary Kft car parts manufacturer won
contracts to produce sensor clusters for global carmakers General Motors and
Toyota, the Budapest Business Journal reported recently.
The company will employ 1,000 people in Veszprem to manufacture and deliver
three million car parts shortly. Szalontay said the company is expecting net
revenue of HUF 55bn with a profit of HUF 10bn this year.
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ENERGY
AES-Tisza ends plant revamping
Hungarian AES-Tisza Eromu Kft completed the 860 MW Tisza power II plant
renovation project, the Budapest Business Journal reported.
By cutting CO2 by 94% and Nox by 56% the life of the plant increases until 2016,
AES Corporation said in a statement. The refurbishment project cost US$126m and
was finalised on time, it added. AES Hungary country manager Peter Lithgow said
AES' investment in this plant enables to supply clean, competitive and reliable
electricity for Hungarian customers and contributes to the safe operation of the
Hungarian national grid. At present, AES owns and operates three power
generating facilities in Hungary and employs 500 people.
Green profits
If the experience of one Budapest-based energy technology firm is telling,
Hungary is proving a fertile market for energy innovations, Budapest Business
Journal reported recently.
Eetek Energy Efficiency Technologies Kft is showing that an environmentally
conscious approach to business can also be profitable.
Since 2001, Eetek has carried out a string of innovative projects in the energy
sector, ranging from co-generation projects that bring increased energy
efficiency to businesses and hospitals, to the upgrade of lighting elements used
in the public lighting of 68 municipalities around the country, to the
construction of power stations utilising renewable resources.
With a commitment to profit-making but environment-friendly projects, Eetek,
which is capitalised at some 30m Euro, plans to launch two
electricity-generating wind farms by spring 2006.
American Lansing Gatrell, 31, the firm's managing director, characterises much
of the work done so far as "energy outsourcing."
"We find a company that wants to improve its energy consumption, but
doesn't want to pay for it," says Gatrell. "We provide the needed
financing, and specialise in energy management to leave the company to its
specialties."
As the business models of each of its projects reveal, the secret to Eetek's
profitability lies in the subsidised pricing of efficient energy production, as
required by the EU, says Gatrell. So when an organisation outsources its energy
production to Eetek, he explains, Eetek pays for the energy upgrades itself in
anticipation of subsidised pricing.
A solution Eetek provided for Raba Automotive Group in Gyor serves to illustrate
the concept. As Gatrell explains, Eetek first acquired all of Raba's energy
assets. Then the company retooled the basics, which included replacing the
rerouting pipes and cables. A trio of 9-megawatt gas engines were installed to
generate electricity, and - indirectly - both heat and cooling.
Eetek sells the heat directly to Raba's other business units, while some of it
is converted to cooling and sold to carmaker Audi Hungary Motor Kft, which
operates within the same industrial compound in Gyor.
Meanwhile, the electricity generated is sold back to the public grid for a price
subsidised by the state as a reward for efficiency, as required by EU law. Eetek
then buys electricity off the grid at a lower price, and sells it at a profit to
Raba.
Today Raba has lower energy costs, claims Gatrell, and is spared the headaches
of managing its own energy production.
A similar "tri-generation" model was installed in Mosonmagyarovar,
northwest Hungary, on behalf of the local district heating company, and 70
smaller industrial firms, including industrial bauxite derivatives maker Motim
Rt.
"Things are more comfortable for us now," says David Gerezdes, deputy
CEO of Motim. "Central heating costs are down, and we're better able to
focus on our core activities."
Gerezdes adds that last December, Motim launched its second cooperation with
Eetek, to build a wind farm in Mosonmagyarovar. This will be a 3-turbine
facility with an annual output of 6,000-8,000 megawatts.
The latter is one of two such wind projects Eetek plans to complete in 2006. The
other is a 30-turbine wind farm planned for Harskut, near Lake Balaton, with an
expected annual output of 120,000 megawatts.
Eetek estimates these projects could spare the environment 70,000 tons of
greenhouse gases per year. Getting clearance to start construction, however, has
not been easy, especially in the case of Harskut.
"It was a painful and slow process," says Gatrell. "The licensing
process involves dealing with a host of local authorities. One hostile local
official can stall the whole project."
Another difficulty, Gatrell adds, is the 2010 expiration of the current
subsidised price formula for energy generated by wind projects.
"You have no idea what price you'll get after 2010, thereby making it
difficult to get bank lending," he explains.
Under the eventual settlement reached with the village of Harskut, a portion of
Eetek's investment paid for the reopening of the local school, hiring a
permanent physician, and repairing buildings and roads. The sum was equal to 50%
of the current village budget.
Eetek's local partner in the project, the Renewable Energy Centre of Harskut, is
pleased with the progress of the partnership.
"We consider Eetek our strategic partner, despite the fact they are a
profit-oriented investment company," said Karoly Radzik, director of the
centre. "They always find investment opportunities that are profitable with
respect to environmental protection considerations."
Gatrell says the Motim and Raba projects are evidence that his company's model
has begun to take hold in Hungary. In addition, he adds, ongoing outsourcing
projects for municipalities in Salgotarjan, Vac and Dunakeski, and for private
firms such as Agro-Chemie Kft and Nitrokemia Rt, have resulted in more efficient
energy production and lower costs for clients - and profits for Eetek.
Gatrell says the company now has a healthy stock of projects in the pipeline,
adding that local banks are no longer afraid to lend money to help pay for them.
With ten deals closed so far, and more than 15 audits carried out on the energy
efficiency needs of businesses and civic entities, Gatrell says he has received
over 40 letters of intent concerning possible future projects. Subsidiaries have
been established in Croatia, Slovakia and Bulgaria.
"We have 2 wind projects that we hope to begin by the end of this
year," he confirms. "In outsourcing, we have completed projects for
local organisations that have improved their economic efficiency, lowered
pollution, and used local capital in addition to our own."
Eetek was cash flow-positive for the first time last year, Gatrell reveals. The
company predicts it will generate profit of approximately 1m Euro on revenue of
30m Euro in 2005. It expects to double the profit figure in 2006.
According to its own website, Eetek is owned by the Dexia-FE Energy Efficiency
and Emission Reduction Fund, an innovative investment fund dedicated to
environmental protection and rational energy management.
This fund was set up in 1999 by the European Bank for Reconstruction and
Development (EBRD) and the Belgian-French Dexia, a bank engaged primarily in
providing funding for local governments, in order to secure financing for energy
efficiency-improving projects in the Central and East European region.
The Eetek website states that the aim of the Dexia-FE fund is to invest a total
of some 200m Euro in the EBRD's target countries.
Mo1 Q1 earnings beat forecasts
Hungarian oil and gas group Mo1 Rt announced to the Budapest Stock Exchange Rt
(BET) recently that its net profit in the first quarter rose 37% year-on-year to
Ft 71bn (284m Euro), and operating profit a massive 48% to Ft 91.6bn, Budapest
Business Journal reported.
The BET's largest-cap stock beat the consensus market forecast by over 8%.
According to the company's statement, net profit increased owing to higher sales
volumes and more favourable spreads - particularly, increasing spreads in Mol's
favour - between Brent and Ural crude oil prices.
The company said it also benefited from high demand for diesel, which has a
higher margin than gas, as consumption patterns start to favour the more
efficient fuel. Diesel sales in Hungary, Mo1's biggest market, rose by 4%
year-on-year.
Overall, net sales revenues came to Ft 571.2bn, up 21% from the first quarter
2004, while Mo1's EBITDA rose by 37% to Ft 118.5bn. Operating cash flow was up
2% at Ft 97.1bn in January-March, up 2% on the first quarter last year.
Fuel exploration and production notched operating profit of Ft 16.9bn in Q1
2005, compared to Ft 12bn in Q1 2004, driven by higher crude prices and
increased production at Mo1's Siberian oil field.
The natural gas division's operating profit rose by 45% year-on-year to Ft
30.4bn, mainly due to higher sales volumes and the different accounting
treatment of cushion gas in storage, the company said.
Mo1's petrochemical division had an excellent quarter, with operating profit
rising to Ft 9.6bn in Q1 2005, from Ft 3.8bn in 2004. According to Mo1,
increased sales, efficiency improvement measures, and an improved business
environment contributed to the significant strengthening of operational results,
which were the main reason for the company's growth.
The Ft 91.6bn total operating profit beat expectations by 10.7%. Mo1 said this
increase "was supported by previous years' investments in quality
down-stream assets, higher product sales volumes of downstream and petrochemical
products, and the consistent application of fair, EU-compliant regulation in the
gas business."
Tamas Pletser, CEE oil and gas analyst at Erste Bank Investment Rt, concurred,
stating that refining margins in the period was very good.
"Refining margins are considerably higher than the industry benchmark as a
result of the upgrades," he said, adding that he has an 'accumulate' rating
on the stock. "Overall, we would say that Mo1's Q1 was better due to very
strong downstream and natural gas profitability, which were above our
expectations."
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FOREIGN LOANS
EIB offers financing for development of Hungary
The European Investment Bank (EIB) will be financing projects worth 157m Euro to
help in the development of Hungary, the bank said in a recent statement. The
restructuring of the 131km railway line connecting Budapest with the border to
Romania is one of the main projects. The price tag is 27m Euro. The construction
of the 26.5km ring Road M0 motorway will cost 50m Euro, New Europe has reported.
The EIB has also signed global loan agreements with OTP Bank and MKB to serve
for the financing of small-and medium-scaled projects promoted by a range of
private and public promoters in the field of energy, energy savings,
environmental protection, infrastructure, health and education facilities,
industry, services or tourism in Hungary.
These loans are worth 80m Euro and it is expected that they will help drive the
Hungarian economy. Hungary's most important projects at the national level
supported by the EU will strengthen the country's integration with the EU member
states.
The bank's loans will support project implementation by providing funds in
advance of the receipt of the corresponding EU grant payments. The vice
president of EIB welcomed the operation of bank offering co-financing with EU
Cohesion Funds in Hungary.
EIB Global Loans have been developed as a successful tool in providing long-term
EIB funds for financing smaller projects implemented by the SME's or by
municipalities under favourable conditions.
They represent credit lines to financial intermediaries - EIB partner banks -
that on-lend EIB funds under their own management, at their own risk and own
conditions but which should reflect the favourable lending condition of the EIB.
The EIB is the most important external source of finance for central and eastern
Europe. Since 1990, the EIB has lent a total of about 30bn Euro to the new
member states and acceding countries. Loans provided in Hungary have already
exceeded 4.5bn Euro during the mentioned period.
In another development, the EIB inked a 100m Euro loan with the Student Loan
Centre (Diakhitel Koezpont) in Hungary to be channelled into loans financing
costs incurred by students pursuing undergraduate and graduate degrees at
Hungarian higher education (HE) institutions, EIB said in a separate statement.
The Diakhitel Koezpont's student loan scheme provides financial aid to eligible
undergraduate and graduate HE students regardless of social or educational
background. This is of particular significance in Hungary whose higher education
structure has undergone massive transformation in recent years.
The EIB loan may cover part of new student loans in the academic years
2005/2006, 2006/2007 and 2007/2008. EIB considers the role of the scheme is set
to grow in the near future as government budgets in Hungary face heightened
constrictions and students increasingly rely on additional financial resources,
the bank said in the statement.
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INFORMATION TECHNOLOGY
Software sector seeks new opportunities at home and abroad
Software developers in Hungary are looking out for new opportunities, Imre
Takacs, CEO of Minor Group said recently, New Europe reported.
"Our main focus right now is developing solutions for e-government, which
encompasses both central and local government," Takacs said. According to
the chief, there is a big need for software development.
In small companies there is a need for the development mainly in the field of
devising ERP software. The SME segment is highly competitive and calls for a new
approach on the part of software developers, he explained. Large international
players like SAP and Microsoft are stepping up their activity among medium-sized
enterprises. Takacs said Hungarian IT companies could cooperate on producing new
IT systems, which could e exported globally. Gabor Bojar, Graphisoft's founder
and chairman, reaffirmed Takacs' view. He highlighted the potential for Hungary
to specialise in the high-volume development of packaged software, such as his
own company's globally successful architectural software, ArchiCAD, which has
over 100,000 customers worldwide.
Revolution also sees an opportunity for local IT companies to make specialised
products. It developed a software package for a concrete plant and another for
an outdoor clothing company. Hungary has done a lot of developments in the
mobile industry though Hungary's mobile operators are foreign-owned. CRM
software for pre-paid telecommunications is the biggest example.
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TELECOMMUNICATIONS
Nokia and Siemens to supply Vodafone Hungary 3G network
Vodafone Hungary Rt announced that Nokia of Finland and Siemens of Germany will
be the suppliers for its 3G network, the Budapest Business Journal has reported.
Siemens Communications, as the sole supplier, will provide the 3G-radio network
and related services.
Siemens communications will deliver and install all necessary WCDMA radio
equipment for the implementation of a 3G mobile network across the country.
This includes Hungary's capital Budapest and other major cities. Siemens
Communications provides convergent technologies, products and services for
wireless, fixed and enterprise networks and operates in some 160 countries.
Vodafone Hungary selected Siemens Communications to offer its customers a
portfolio from devices for end users to network infrastructures for enterprises
and carriers.
Nokia Oyj also concluded an agreement for the supply of the complete 3G-core
network and related services. Nokia has been Vodafone Hungary's sole supplier of
GSM infrastructure since it began developing its network in 1999. Nokia
concluded an agreement for the supply of a complete WCDMA 3G core network to
mobile operator Vodafone Hungary. Nokia is providing its 3GPP Release 4 based
MSC Server System that will support the operation of GSM and WCDMA 3G networks
of Vodafone Hungary, the Finnish company said in a statement. Nokia MSC Server
System will provide delivery and care services such as installation,
commissioning and integration.
Nokia Multimedia Gateway and Nokia packet core network equipment for 3G will
provide Vodafone Hungary the capability to launch 3G multimedia services. Nokia
continues to supply Vodafone Hungary with 2G equipment and services.
Mixed picture for M Telekom
Hungary's leading telecom services provider, Magyar Telekom Rt (MT), formerly
Matav, recently posted a 27.6% year-on-year rise in consolidated first-quarter
net profit, despite a 1.7% drop in revenues over the same period, Budapest
Business Journal reported recently.
MT recorded net profit of Ft 17.96bn (71.8m Euro) in the first quarter of 2005,
compared to Ft 14.1bn in the corresponding period of 2004. Profit was up over
10% on the consensus estimate.
Within revenue slippage, the fixed-line business dropped the most, with a 6.7%
fall to Ft 79.15bn. Conversely, revenues of the mobile unit, T-Mobile Hungary Rt,
rose 5.1% to Ft64.45bn, while the EBITDA margin slipped 2% to 41.2%.
Consolidated operating profit rose 19.6% to Ft 31.8bn, owing mainly to a fall in
depreciation, payroll costs and the wholesale price of telecommunications
equipment, MT's report stated. Revenue on leased lines and data transfer
services rose 24.4% to Ft 14.9bn, while revenue from landline calls dropped
21.9% to Ft 26.5bn.
In the various business lines of the company, MT's ISP T-Online Hungary Rt
(formerly Axelero Rt) retained its market dominance, taking 43% of the market,
down a percentage point from last year. T-Mobile Hungary also remained the
market leader, though its market share slipped during the period, down to 45.9%
from 47.7%.
Commenting on the results, President-CEO Elek Straub said that in 2005 the
impact of competition has become stronger in both the fixed and mobile
businesses.
"To bring a new impetus to the Hungarian fixed-line business, we are
accelerating our broadband program, and have set a new, higher target," he
said. "We now intend to reach 600,000 broadband customers by the end of
2006."
Looking ahead, Straub said the company is convinced that the rebranding of Matav
and the full introduction of the 'T' brand portfolio will be successful in
further deepening integration among the group's businesses.
He added that MT has completed the acquisition of a majority stake in
Montenegro's Telekom Crne Gore, and is on track to modernise the company and
exploit possible synergies.
Assessing MT's financials, Peter Tordai, head of research at K&H Equities Rt,
noted that, while total revenues and EBITDA were broadly in line with
expectations, a larger than expected drop in amortisation costs helped the
bottom line.
"While we were aware the depreciation and amortisation line would be much
lower in 2005, the actual quarterly figure of Ft 27.3bn came as a
surprise," he said. "As a result of the much lower than expected
amortisation, EBIT came in at Ft 31.8bn, up 19.5% year-on-year."
Tordai added that market reaction to Magyar Telekom's results has so far been
muted.
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