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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: 096 - (26/04/05)
The socialist multi-millionaire in charge
The Hungarian prime minister is Ferenc Gyurcsany, aged 43 and a socialist who
started his political career in the communist youth movement. He is also one of
the 100 richest Hungarians, with a net worth of $21 million, according to
Ringier AG, publisher of Switzerland's Blick newspaper. He accumulated his
fortune by running Altus Rt., a Budapest-based buyout and asset management firm.
The Socialists have governed since 2002 in a coalition with the liberal Alliance
of Free Democrats.
Hungary, with a population of 10.1 million and about $105 billion in GDP last
year, is the third largest among the EU's new members, behind Poland and the
Czech Republic. The other countries that joined the EU last year were the Greek
part of Cyprus, Estonia, Latvia, Lithuania, Malta, Slovakia and Slovenia. There
are now 25 countries in the trade bloc.
Hungarians make about $900 a month on average before taxes, according to
Hungary's Central Statistical Office -- less than a quarter of the $4,000
average monthly income in Germany. They are obviously hoping that their
socialist multi-millionaire of a leader knows the trick of raising their incomes
to Western levels.
Finance Minister Draskovics fired
Gyurcsany faces elections in about a year, in spring 2006. Gyurcsany has given
several party favourites ministerial posts as he prepares for reform and
reconstruction. Gyurcsany is openly cleaning house ahead of the elections.
They look to be on a knife edge. According to an opinion poll published on April
25th, 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.
Although the economy is growing by 4% per annum, there are always a lot of
losers in a country in transition. A pre-election period always induces jitters
in a government lagging in the polls, as the Socialists just are. The leader of
the main opposition party, Fidesz, is former premier Viktor Orban, a very able
operator. Fidesz only lost narrowly in 2002.
A change of personnel is an obvious recourse for a premier in difficulty.
Gyurcsany has fired Finance Minister Tibor Draskovics and replaced him with
Janos Veres, promoting a member of the ruling Socialist Party to push a
programme of cutting taxes and government spending. He has also fired the
minister of agriculture (see below), again replacing him with a party stalwart.
Veres, 48, Gyurcsany's chief of staff and a member of the Socialist Party's
executive board, is the third finance minister since the Socialist-led
government took office in 2002. The removal of Draskovics was the easier because
he is not a party member.
Draskovics, 50, had been finance minister since Feb. 16, 2004. A technocrat and
former deputy chief executive at K&H Bank Rt., Draskovics was appointed by
former Prime Minister Peter Medgyessy after his predecessor Csaba Laszlo failed
to control spending in 2003, leading to a wider-than-planned budget deficit.
The premier said Draskovics's policy of high taxes coupled with high government
spending was not ''feasible.'' The government has cut the personal income tax in
the past two years, and made up for the revenue lost by raising other levies,
such as the value added tax and the corporate tax on banks.
''There was a lack of political commitment to take the painful steps that would
result in a sustainable improvement of the budget balance,'' Draskovics said at
a press conference in Budapest following his dismissal. ''If the necessary
political commitment is there now, then this is an opportunity that the country
must grab.''
The markets averse to his dismissal
But his dismissal has not been well received by the markets. ''With
Draskovics not part of the government, the situation will become more and more
awful,'' said Frank Jansen, who manages $2 billion in East European bonds for
KBC Conseil Service in Luxembourg. ''I'm becoming pessimistic about Hungary.
They are not going to cut the budget deficit for political reasons, even though
it's all they have to do.''
''It is clear that Draskovics has been sacked partly because the 2005 budget is
now on course for a sizeable overshoot and because he can be used as a
scapegoat,'' said Lucy Bethell, an economist at the Royal Bank of Scotland in
London, in a note to clients.
''We are concerned that Veres will engineer a pre-election budget,'' said Zsolt
Papp, a strategist at ABN Amro Holding NV in London. ''We'd be really surprised
if certain interest groups, like pensioners, university students or farmers,
didn't get election presents.'' Some factions within the Socialist Party, led by
a former executive Gyorgy Janosi, have pushed for higher spending and a
postponement of the euro deadline in the past few years.
Failure to restrain spending and lower budget deficits may delay the switch to
the euro, eroding the benefits of joining the EU, says Monica Mastroberardino,
who helps manage $270 million in Eastern European bonds at Bank Vontobel AG in
Zurich. ''They cannot tackle these problems, that is clear, because they want to
be re-elected,'' she says. ''The private sector has done a lot, but the public
sector is lagging in restructuring and improving efficiency.''
The prime minister on April 14th promised an overhaul of public finances from
health care to welfare benefits, enabling him to cut taxes to stoke up economic
growth and to keep the nation on course to start using the euro in 2010. But the
forint and bonds declined afterwards on concern that Veres will ease spending
restrictions and introduce populist measures a year before general elections.
Veres pledged to maintain the government's policy of adopting the euro by 2010
and said the 2005 budget targets were ''achievable''. The government seeks to
cut the budget deficit to 4.7 percent of gross domestic product from 5.4 percent
last year. Government debt was 60.7 percent last year, breaching the 60 percent
debt-to-GDP ceiling imposed for euro candidates.
Into the euro
Gyurcsany has vowed to adopt the euro as Hungary integrates into the
European Union after the bloc admitted it and nine other countries last May. To
meet the EU's conditions for swapping the euro for the forint in 2010,
Gyurcsany's Socialist-led coalition government is trying to lower the budget
deficit to less than 3 percent of gross domestic product. To get there, he will
have to scale back social programmes established during four decades of Soviet
control before the collapse of communism in 1989.
Gyurcsany's task is complicated by opposition to spending cuts from voters,
particularly with general elections due in the second quarter of 2006. The prior
prime minister, Peter Medgyessy, 62, raised government salaries 50 percent three
years ago to meet campaign pledges. He was booted out of office in a party
revolt last August when the Socialists' approval ratings sank to three-year
lows, after the government curbed wage growth, cut housing subsidies and raised
some taxes.
Hungary, which joined the European Union a year ago, seeks to adopt the euro to
complete its integration into the world's largest trading region. The country
fails to meet the budget deficit, inflation and debt conditions for the
switchover and the government, which faces elections in about a year, has missed
its targets to cut spending over the past three years and will probably breach
goals again this year, economists said.
Gyurcsany's new credo
Gyurcsany has said high taxes are suffocating companies, while taxes can't
be lowered without an across-the-board overhaul of public administration.
At a Socialist convention he sought to rally party membership behind his plans:
''The Hungarian political elite has only been giving explanations why they are
not changing the structure'' of public finances ''and since 2001 the prevailing
political view is that we need higher taxes and higher redistribution of
goods,'' said Gyurcsany at a press conference. ''I personally need wider
political support,'' he said with astonishing candour.
Gyurcsany set up a committee to explore the scope for tax reductions and has
criticized its proposals, which were also approved by Draskovics, for not being
bold enough. The committee suggested tax cuts as well as increases to keep
revenue intact, which looks as though it is somehow failing to grasp the nettle.
Gyurcsany, who's been prime minister since September, says he will resist
pressure to spend in an effort to appease voters. ''All my predecessors applied
this policy of introducing some very popular measures before the election,'' he
said in an interview on Jan. 25. ''And what was their fate? They lost the
election.''
Hungary has changed governments in the three general elections since the first
free ballot was held in 1990. The premier has said that in a few weeks he will
put forward his specific proposals.
Hungary's agriculture minister sacked
On April 25th Gyurcsany announced that he had sacked his agriculture
minister, one week after firing the country's finance minister. "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
European Union 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 agriculutre 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 more than a politician," he said.
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."
On April 25th Gyurcsany 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.
The right-wing Fidesz commented that Nemeth's dismissal was "an admission
by the government that its agriculture policy had failed."
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AUTOMOBILES
Raba gets back in black
Automotive engineering firm Raba closed the year with a positive net income for
both the fourth quarter and the full year, following huge losses in the previous
year, Interfax News Agency reported.
The improvement mainly came from financial items, as the company still continues
to produce negative results at the operating level.
Net income in 2004 amounted to HUF 1.8bn and HUF 41m in the fourth quarter
alone. Raba's 2004 business plan called for revenues of HUF 41-42bn, with a
negative operating income and a "positive zero" net income. According
to figures for the year, revenues were slightly below expectations at around HUF
40.2bn. However, this still represents a 27.1 per cent increase over 2003, while
revenues were also up from HUF 9.9bn in the base period to HUF 13.4bn in the
fourth quarter.
Non-administrative costs, however, were also up sharply during the year, rising
an average 25 per cent to account for around 85 per cent of sales in 2004. Total
costs during the year amounted to HUF 45.7bn, combining to produce operating
losses of around HUF 5bn, slightly down on the year. Among the negative factors
affecting operating profits were rising raw material prices and the HUF's
strengthening against both the Euro and the US dollar, Raba said.
According to an earlier company statement, steel procurement costs were
negatively affected by the liquidation of former supplier, Borsodi Nemesacel
(BNA) during the year. To offset rising costs - by as much as 60 per cent in the
case of certain steel components - Raba introduced a surcharge for its large
buyers on products with high raw material content in prices, while the company
has introduced blanket price increases for small buyers, which also covered the
rise of steel prices.
As a result, this particular condition no longer affected Raba's margins
negatively in the second half, the company noted. Financial operations
contributed significantly to positive net income in 2004. Net income from
financial operations in 2004 amounted to HUF 6.9bn. a significant proportion of
this came from realised and unrealised gains on currency hedging transactions.
Last year 59.7 per cent of Raba's revenue came from export sales, down slightly
on the previous year's figure of 60.6 per cent.
The US market experienced growth of 21.1 per cent during the year, producing
sales in the Value of US$56.2M, driven by an upturn on the US market of utility
vehicles. Growth in Europe was concentrated in the west and south European
markets, thanks to the gearing up of projects launched earlier, the company
said.
An average Europe-wide growth of 45.6 per cent resulted in revenues of 46.9m
Euro across the continent, even as CEE sales were stagnant. Meanwhile, domestic
sales were up 25 per cent in the period to HUF 16bn. By segment, the flagship
axle division boosted sales by 25.9 per cent and the automotive components
division by 9.8 per cent, while sales of the vehicle division rose nearly
fourfold as the serial production of military vehicles for the Hungarian army
got underway in the latter part of the year. The vehicle division was also the
only one to record a positive operating income in the fourth quarter as well as
for the year as a whole.
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AVIATION
More discount airlines expected to enter market
Following EUjet's start in March FlyNordic will become the 12th low-cost carrier
with flights out of Budapest when it enters the market in June. Tourism
professionals say discount airlines are already playing a key role in boosting
tourism to the capital - with additional players expected to join the fray in
the near future, the Budapest Business Journal (BBJ) reported recently.
Besides Eujet and FlyNordic, the domestic low-cost market consists of Aer Lingus,
Air Berlin, easyJet, Germanwings, Jet2, Norwegian Air Shuttle, SkyEurope,
Sterling.dk and Wizz Air, and also Snowflake, which was the firs discount
airline to appear at Ferihegy in the autumn of 2003. However, Snowflake's parent
company, the Scandinavian airline SAS, decided to discontinue the Stockholm
flight last October.
Snowflake's web page currently offers tickets for SAS flights that are aimed at
the low-cost segment, Maria Kormendy-Ekes, SAS sales director for Hungary, told
the BBJ.
Discount airlines contributed 108m Euro to the national tourism total in 2004 -
the sum of direct tourism revenue from approximately 400,000 foreign
"discount" visitors last year - according to national tourism
marketing company, Hungarian Tourism Rt (MT).
In addition to joint marketing campaigns with low-cost carriers, MT is also
aiming to make use of the popularity of discount airlines through its "Fly
& Bus" concept. Fly & Bus Hungary Kft, the company set up for this
purpose, has teamed up with Air Berlin to offer travel packages built around
discount flights, bundling lodging, catering, transfers and programs.
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ENERGY
LUKoil buys AVA stations
LUKoil Downstream Hungary has bought the AVA - formerly called Avanti - chain of
petrol stations in Hungary, Budapest Business Journal reported.
LUKoil signed the purchase contract on March17, 2005. AVA now has 15 petrol
stations in the country. The acquisition fits well into LUKoil's central/eastern
European strategy. LUKoil Downstream Hungary was earlier reported to be planning
the construction of 100 to 120 petrol stations at a cost of US$120m over the
next 30 months. LUKoil entered Hungary in late 2003 and chose organic means for
growth. The Hungarian network is to be supplied mainly from LUKoil's
Romania-based refinery in Ploesti.
MOL to boost treasury shares
Hungarian oil and gas company, MOL Rt, has commissioned ING Bank to carry out
treasury stock purchases from the free float, MOL said in a recent statement
published on the website of the Budapest Stock Exchange (BET).
The company currently holds MOL stocks representing 5.16% of its registered
capital. There is a possibility to boost its stake to a maximum of 10%. The
transactions must e completed by October 31st this year. ING Bank is the sole
agent commissioned to carry out the acquisitions. Hungarian economy is on a
"moderate growth trajectory." Hungary's gross domestic product (GDP)
will grow 3.8% in 2005, economic research institute GKI said in a general
forecast for the year. According to the researchers, export is expected to
increase by 14% while the country's industrial output might be 8% higher than in
2004. The national economy will be driven by exports and new investment.
Spotlight on river power
Inventor Laszlo Oroszi hopes that river power can be considered to be an
alternative energy system, the Budapest Sun reported.
He believes that rivers hold at least one of the keys to Hungary meeting
European Union directives on renewable power. EU members must produce at least
6% of their energy via renewable sources by 2010. A discussion on whether there
is a possibility of increasing this to 12% by 2020 will be carried out at the
next meeting between Hungary and the EU.
Currently only 3.6% of energy generated in Hungary comes via alternative
sources, primarily from wind farms, bio-plants (wood chipping) and solar panels.
It excludes nuclear energy. Wind and sunshine have sporadic cycles in Hungary,
and it needs huge storage facilities for fuel to run bio-plants, which is very
costly.
Oroszi told the Budapest Sun: "Electricity cannot be stored in bulk form
and must constantly be generated. So far very few experts have even considered
using Hungary's rivers to harvest much needed energy."
He explained that this is currently the sole source that can offer alternative
energy producers "clean or green energy non-stop." According to him,
"Every second, billions of cubic metres of river water is flowing through
Hungarian territory." Oroszi said that, based on scientific research, the
Danube river which flows a total 417km in Hungary has a production of 2,270
cubic metres per second, and flows at 1.18 metres per second which was measure
at Nagymaros, while the Tisza river which flows 596km in Hungary yields about
740 cubic metres per second at a speed of 0.61 metres per second, measured at
Szeged.
With the EU subsidising green projects, Oroszi has received many inquiries
concerning his patented idea for a replaceable cluster of generators producing
power from flowing water, for which feasibility studies are also underway.
"It would be an offence not to harvest the colossal amount of money saving
energy available in Hungarian rivers when the world is yearning for renewable
sources," he noted. Even the slowest flowing, so-called 'passive rivers'
can be utilised to harvest electricity, even to supply whole villages
nearby," he said. Oroszi added that the system is "guaranteed to not
only be profitable, but also to be environmentally friendly."
The European Environment Agency (EEA) studied that European Union of 15 together
hands over an annual US$5.3bn in subsidies towards renewable sources.
So alternative energy system will affect not only the environment part but also
money saving projects available in Hungarian rivers.
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FOOD & DRINK
Nestle posts increased revenues, plans investments
Booming export sales propelled food manufacturer Nestle Hungary Kft to all-time
high revenues last year, the company announced recently, the Budapest Business
Journal reported.
Solid growth is expected in 2005 as well, with Ft 3.5bn (14.2m Euro) of
investments and new products in the pipeline.
"Both our revenues and our profits grew by approximately 20% last
year," said managing director Laurent Freixe, While domestic sales
stagnated, which he said was due to last year's drop in real wages and
tightening competition after EU accession, exports grew 32.4%.
Exports thus contributed Ft 32.8bn to the company's overall revenues of Ft
70.3bn, with after-tax profits at Ft 2.7bn, representing a 19.7% rise
year-on-year.
"Given the large pool of our foreign currency based loans, and the fact
that the value of our imports evens out our exports, our results were favourable
even in spite of the strong forint," noted Freixe.
Regarding investments for this year, he highlighted the inauguration of the
firm's new logistics base in Buk, western Hungary, in the fourth quarter of this
year.
"Another line of our investment affects our food services division,"
he added. "We will increase the number of our points of sale, such as
freezers, vending machines and office coffee machines."
In the third leg of investments, Nestle is preparing for its global
inter-enterprise IT platform entitled GLOBE.
Regarding Nestle ice cream division, Scholler, Freixe noted that it contributed
Ft 5.3bn to overall revenues.
"2004 was the first year Nestles consolidated full-year balance sheet
included the results of Scholler," he noted, adding that the division will
soon be renamed Nestle Ice Cream Hungary Kft, and former Scholler products
rebranded as Nestle.
"The rebranding will not present a heavy financial burden. Being seasonal
products, ice creams are revamped each year anyway," Freixe said.
Pick bought
Meat processor Delhus Rt, the subject of a November 2004 buyout by OTP Bank Rt
chairman-CEO, Sandor Csanyi, recently bought a 31.21% stake in Hungary's leading
salami maker, Pick Szeged Rt, the Budapest Business Journal reported.
The move has sparked market rumours that Delhus aims to buy a majority stake in
the Szeged company.
Delhus, 75% owned by Csanyi's Meat Invest Kft, purchased the Pick stake from
Arago Investment Rt, a Hungarian-owned holding company. The transaction gives
Meat Invest 32.16% voting rights in Pick.
Prior to the sale to Delhus, completed on March 16th, Arago purchased a 25.75%
stake in Pick Szeged from R-KO-N Agricultural Products Processing and Trade Kft,
boosting its ownership rights to 94.97% and its voting rights to 97.85%.
The new transaction, in which Arago sold a 31.21% stake in Pick to Delhus,
reduced Arago's ownership to 63.76%.
Current press speculation has it that Arago wishes to eventually divest itself
of its majority stake in Pick, with Delhus the likely buyer.
R-KO-N is owned by Gyula Roman, who recently quit Pick's board of directors.
Arago became the majority owner in Pick in 2002, and delisted its shares from
the Budapest Stock Exchange Rt in the same year.
Pick Szeged had consolidated pre-tax losses of Ft 5.08bn in 2004, according to
Hungarian accounting standards, against losses of Ft 346m in 2003. Net sales
rose 8% to Ft 50.04bn in the same period.
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FOREIGN INVESTMENT
Hungary proving to be on the cutting-edge of M&A activity
Hungary now is seen as the hottest place for investors, there are always
meetings with senior investment executives of private sector and multinational
corporations, the Budapest Sun reported recently.
According to research conducted by the London-based business Intelligence
Company, the merger Market Group (MG) said mergers and acquisition (M&A)
deals are making Hungary and the surrounding region develop into one of the
hottest places in Europe.
The group recently completed what it called an "investment mission" in
Hungary. Elisabeth Nygren, press spokesperson for MG, told the Budapest Sun that
the group produced a unique "heat chart" of Europe, showing the
current favourite M&A "hot spots" for investors. The investment is
flowing in food products, technology, energy, estate business and even the
privatisation of state owned companies," she said, adding that the
Hungarian telecom sector is also expected to have significant number of deals in
the "foreseeable future."
Nygren explained that Hungary is considered a good place for doing business. She
said that multinationals view investment in this region is very attractive, as
they seek to gain market penetration amidst faster income growth then in their
home market.
Peter Hegedus, CEO of ABB Hungary, said in one of the investment mission
meetings that despite the fact that labour costs are lower in some other EU
countries, Hungary is probably still the top country in terms of quality and
efficiency. He explained that ABB's operations in Hungary are considered the
most efficient in the group's worldwide network. He added that the same goes for
the Swedish group Electrolux, where its Hungary-based plant has the highest
quality worldwide, with the fewest products returned during their two-year
warranty period. M&A activity in Hungary increased steadily in 2004 compared
to the previous year and the trend is expected to continue.
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