Books on Hungary
% of GDP
Update No: 104 - (01/01/06)
Budapest under pressure from Brussels about budget deficit; election
In August 2004, Socialist prime minister Peter Medgyessy tendered his
resignation after a cabinet dispute. The Socialists chose businessman and sports
minister, Ferenc Gyurcsany, as the new head of government. The next
parliamentary ballot is tentatively scheduled for April 2006, only months away.
The government is digging in its heels over its spending plans, which are being
sharply criticized by Brussels. Hungary's deficit was projected to top 6.1 per
cent of its GDP in 2005. The European Union (EU) economic and monetary affairs
commissioner, Joaquín Almunia, said that concern for the situation would lead
to "very strict" recommendations to the country. Almunia indicated
that the withholding of EU development assistance to Hungary is a distinct
Responding to the remarks, Gyurcsany told the Financial Times that, with the
election looming, he does not intend to cut spending on infrastructure or on
social welfare payments. Gyurcsany added, "Hungarians' living standards are
much lower than the European average. What the hell would Europe like to have
The Hungarian Prime Minister has asked the president of the European Commission
for understanding over the country's large budget deficit and hinted that the
large spending cuts required to address the issue could lead to social unrest.
"We know meeting the Maastricht criteria is important, but lots of changes
necessary for the development of our country are burdening the budget,"
Prime Minster, Ferenc Gyurcsany, told the press after meeting commission
president, Jose Manuel Barroso, in Budapest. "The whole country doesn't
agree with changes forced through by the political elite ... we don't want riots
like in Paris and we don't want to hold back the country's development," he
continued. "This is why we ask for understanding."
Hungary joined the European Union in May 2004, and must reduce its deficit to
three per cent by 2008 in order to meet the Maastricht criteria for Euro
adoption in 2010.
The deficit has grown dramatically, as Hungary was forced to factor in various
hidden costs, and the government has come under pressure from the European
Commission to take action to reduce its deficit. The European Commission
announced it expects the deficit, after being 6.1 per cent in 2005, to stand at
6.7 per cent in 2006 and 6.9 per cent in 2007. The targets in Hungary's
convergence programme were 3.6 per cent for 2005 and 2.9 per cent for 2006.
Gyurcsany had already said that public spending would have to be cut by US$1.45
billion (1.2 billion Euro) per year to get the deficit down to Maastricht
levels, cuts he described as "too harsh." Barroso also met Viktor
Orban, the leader of the main opposition party Fidesz. Orban said he had asked
Barroso not to authorise sanctions against Hungary.
"I asked him not to punish the Hungarian people just because the government
hasn't told the truth about the budget over the last three years," Orban
Barroso refused to comment on the deficit issue, simply saying that he was sure
that Hungary understood the importance of a stable fiscal environment.
Orban's Fidesz still ahead
The opposition Citizens Party (Fidesz), which only narrowly lost last time, has
extended its lead, according to a poll by Szonda Ipsos. 31.4 per cent of
respondents would support Fidesz - led by former prime minister Orban - in the
next general election, according to Angus Reid Global Scan.
The ruling Hungarian Socialist Party (MSZP) is second with 25.8 per cent,
followed by the Alliance of Free Democrats (SZDSZ) with 2.6 per cent, the
Hungarian Democratic Forum (MDF) with 1.7 per cent, the Hungarian Justice and
Life Party (MIEP) with 1.4 per cent, and the Centre Party (CP) with 0.7 per
Support for Fidesz increased by 2.5 points in a month, while backing for the
MSZP dropped by 0.8 points.
The election is increasingly looking like a shoe-in for Orban, who has the aura
of authority and of experience, despite still being young in political terms,
Government must reduce deficit for Euro entry, says MNB
It is not only Brussels that is urging fiscal restraint on the government. So
are local economists and bankers. Their advice is not likely to be heeded at
such a time. It will be for the incoming government in a few months to grasp the
nasty nettle of reform and retrenchment'
Hungary's National Bank (MNB) recently urged the government to take further
measures to meet the 2010 Euro adoption goal in its November convergence
programme report. "Euro adoption provides a unique opportunity for
Hungary… to exploit the benefits of a stable, predictable macroeconomic
environment more rapidly and catch up to European Union economies more
quickly," the bank said. "It is in the best interests of the Hungarian
economy to fulfil the criteria as early as possible," it continued.
The bank, however, warned that drastic measures were required, or Hungary's
public sector deficit could rise as high as 9-10.6 per cent of Gross Domestic
Product (GDP) in 2008. Although Hungary must reduce its deficit to three per
cent of GDP by 2008 in order to meet the Maastricht criteria for Euro adoption
in 2010, it is expected to register a budget deficit of 6.1 per cent of GDP in
2005 and 5.2 per cent of GDP in 2006. These figures are much higher than the
country's target deficit figures of 3.6 per cent of GDP for 2005 and 2.9 per
cent for 2006.
The slip came after the government was forced to include a private-public
partnership deal on motorway construction in the 2005 budget and expenses on
military aircraft in the 2006 budget. However, in an interview published in the
Budapest Times recently, the bank's chief economist, Istvan Hamecz, warned that
the 2006 deficit could balloon even higher. "Hidden debts could easily see
the 2006 deficit rise to 12 per cent," he said.
EU finance ministers recently warned Hungary to rein in its deficit, and said
that the new EU member was one of ten countries to join the EU in May 2004, and
the MNB said that Hungary was "the farthest from euro adoption amongst new
member states, since it is the only country which has not met any of the
"The current situation and analysis of the potential solutions indicate
that budget is confronted with serious structural problems and that there is no
easy way out," the report said. The bank said that reducing the
government's operational expenditure alone would not be enough to reduce the
deficit to the required levels. "The balance of taxes and transfers must be
improved in order to meet the Maastricht deficit criterion," the bank said.
The next premier and finance minister will have plenty of problems on their
A consortium of German and Hungarian companies'
A consortium of German and Hungarian companies' plans to build a 250 million
Euro bio-ethanol plant in Hajdusamson (NE Hungary), Ferenc Obreczan, who heads
the Association of Hungarian Farmers' Cooperatives (MAGOSz), announced recently,
New Europe reported.
Farmers representatives discussed the plan with German companies, GEA Viegand
and MDE Dezentrale Energiessysteme GmbH, and Bio-Tech-Energie, a Hungarian
company being set up for the project. The plant will have capacity to produce an
annual 340,000 tonnes of bio-ethanol, he said. It would process 1 million tonnes
of grain grown on 120,000 hectares, and create 200 jobs. The plant will have its
own 50MW power plant, and will sign ten-year contracts with farmers,
Budapest Airport attempts to attract Korean Air
Budapest Airport is holding talks with Korean Air about starting flights to
Budapest, Gyorgy Kepecs, Vice Chairman of Budapest Airport's Board of Directors,
said on November 29. Kepecs said that Budapest Airport, the company that runs
Ferihegy International Airport - would like Korean Air to operate three Budapest
flights a week instead of expanding its Prague operations. He added that talks
would focus on persuading Korean Air to make Ferihegy its European cargo base.
Around 43,000 South Korean tourists visited Hungary last year and more than 20
South Korean companies are present in Hungary, undersecretary at the Ministry of
Economic Affairs and Transport, Gyorgy Gilyan, said, MTI News Agency reported.
South Korean companies will have invested US$ one billion (850 million Euro) in
Hungary after tyre maker Hankook completes its new factory, he added.
British and German firms bid for Budapest Airport
Hungary's State Privatisation Agency (APV) announced that the three companies
expected to bid in the privatisation of Budapest Airport have lodged bids.
Britain's BAA and the German companies Fraport and Hochtief Airport all
submitted their bids for the 75 per cent minus one vote stake in Budapest
Airport, the company that runs Budapest's international airport before the
deadline, APV said in a press release.
No details were given about the size of the bids. APV called a single-round,
closed tender at the end of October, the initial privatisation protest was ruled
illegal due to a lack of consultation with employees. Out of the original five
short listed firms, Australia's Macquarie Airports and Denmark's Copenhagen
Airports pulled out. Macquarie launched a takeover bid for Copenhagen Airports,
and cited this as their reason for abandoning its efforts to gain control of the
airport, which many see as a potential Central European hub. However, analysts
have said that Macquarie was nervous about the problems surrounding the
The problems include the threat of union action, a potential US$600 million (511
million Euro) lawsuit by a previous operator and the possibility of the
opposition Fidesz re-nationalising the airport if it wins next spring's general
APV received a maximum bid of US$1.95 billion in the first round of the
cancelled process, and the privatisation had been expected to reach a much
higher figure before being beset by problems.
Low-cost airline business grows amid over capacity woes
SkyEurope on November 21st became the latest low-cost airline to announce huge
growth in traffic to Budapest, but concerns remain over Budapest Airport's
capacity to handle future expansion.
"Passenger numbers on our Budapest flights have doubled to 538,000 and the
number of flights has risen by 44 percent year-on-year to 5,600," SkyEurope
CEO, Christian Mandl, announced, New Europe reported.
This news is part of a trend of growing low-cost travel to Budapest, with all of
the budget airlines posting a large increase in numbers. Hungarian low-cost
airline Wizz Air announced in October that it had carried two million passengers
in its first 17 months and expected to transport the same amount again over the
next nine months. Both firms are planning to buy new aircraft to meet the
Low cost airlines - including Wizz Air, SkyEurope and easy Jet - have carried
around 15 per cent of all passengers flying to Hungary since the country joined
the European Union (EU) in May 2004.
A survey earlier this year by the Travel, Leisure and Tourism Group of KPMG in
Central and Eastern Europe said this market share is projected to reach 35 per
cent in Hungary by 2010 with 4 million passengers. Terminal 1 at Budapest's
Ferihegy airport was re-opened in September for the exclusive use of budget
airlines. The growth has not been problem-free, however, and many of the
airlines have complained that Terminal 1 is already working at full capacity and
will not meet future needs.
"Even with the building renovation, Terminal 1 is already operating at full
capacity," Gyorgy Peto, easy Jet director for Hungary and Poland said after
the terminal opened.
"We see no opportunity to develop," said Gyorgy Borsos, the Hungarian
director of SkyEurope.
"Most cheap airlines have already taken into account flying schedule
expansions for the coming year and Terminal 1 can barely cope with these."
Budapest Airport, the company that runs services in the airport, refuted this
claim. "We are only working at half capacity at the moment, so there is
enough room for expansion," said Ferenc Marton, the project manager at the
Further expansion of the tiny terminal, which is often crammed with travellers,
will be difficult as the communist-era building is on the protected list.
Budapest Airport is currently being privatized, and three large operators -
Britain's BAA and the German companies Fraport and Hochtief Airport - have
lodged multi-billion Euro bids to capitalize on the ever-growing traffic.
Pannonpower plans HUF 30bn power block
Pannonpower Holding Rt located near the city of Pecs, about 200km southwest of
Budapest in Hungary, is planning to spend HUF 30 billion to set up another two
blocks by 2009, New Europe reported.
Pannonpower chairman and CEO, Laszlo Somosi, told reporters that with the new
bio-plant the company is looking towards the future and hopes to construct
another bio-plant. He says the company is looking to establish mini bio plants
in the region, based on models already operating in Austria and Germany. The
company is encouraged by the success of its first biomass-fuelled power block
installed two years ago. The Pecs-based energy company said the final decision
on the investment was expected in mid-December and construction is due to start
in 2007. Talks are also underway with several neighbouring countries, primarily
Romania and Slovakia, to build new plants and sell its biomass technology
abroad, the company said without going into details. This comes only a week
after RPG Industries, a Prague-based international investment group, bought 85
per cent stake in the company from private equity firm Crossroads Capital.
Richter opens new biotech lab
Richter Gedeon Rt pharmaceutical manufacturer opened a new biotechnological lab
on the company's premises. Richter has spent HUF 4 billion (16 million Euro) on
biotechnological investments over the last five years; the recently completed
project cost Ft 500 million. Richter Gedeon will produce recombinant proteins,
and will also operate an HTS lab for molecular biological and gene technological
research. In the long run, the company has a 10 - 15 year development program,
in which it plans to spend a total of HUF 12 billion on biotechnological
investments, New Europe reported.
Richter CEO, Erik Bogsch, said, "Richter Gedeon spends the highest amount
on research and development. Last year, we spent HUF 10.3 billion on R&D
activities." The amount spent on R&D by Richter had risen to over HUF
10 billion in 2004 as compared to HUF 1 billion in 1993. Central Europe's
largest producer of pharmaceuticals, Richter posted a large rise in
third-quarter profit in 2005.
Magyar Telekom buys Bulgarian telecommunications
Hungary's Magyar Telekom on November 29th sealed a deal to buy Bulgaria's
Orbitel as part of its strategy to become the most significant alternative
telecommunications operator in Southeast Europe. The company bought 100 per cent
of Orbitel - Bulgaria's largest alternative telecommunications and Internet
service provider for US$9.4 million (8 million Euro), and is planning to invest
US$8.24 million (seven million Euro) in the near future, CEO, Elek Straub said,
New Europe reported.
The purchase is a significant step in the company's plans to become a major
player in the regional market, Straub said. "In the coming years Magyar
Telekom wants to become the major alternative wire line service provider in
several countries of the Southeast European region," he said. "We
already have a presence in Romania, Bulgaria and Ukraine, which provide a good
basis for us to continuously strengthen our footprint in the telecommunications
markets of these countries," he continued. Magyar Telekom already has
investments in Novatel in Bulgaria and Ukraine, but wants to take advantage of
the rapid growth in these countries. "We decided we needed more investment
because the economy and markets are going from strength to strength,"
The Hungarian company is also keen to expand in the Romanian market, and will
build on an interconnection agreement between its portfolio company in Romania,
Combridge, and Romtelecom. "The next step in the first quarter of 2006 will
be entry to the Romanian retail market," Straub said. "By the end of
2006, Magyar Telekom intends to be present in every segment of the Romanian
Orbitel last year brought in revenues of US$10.94 million (9.3 million Euro) and
US$1.3 million (1.1 million Euro) of earnings before taxes, interest and
depreciation with 133 employees, Straub said. The firm now employs 150 people
and has 300 clients, 90 per cent of them in the business sphere. Orbitel offers
countrywide voice and data services based on the IP technology.
The Bulgarian telecommunications market currently is worth around US$1.4 billion
(1.2 million Euro) annually. Many Hungarian companies are now looking to the
region for investment opportunities and the telecommunications and banking
sector in particular are attractive.
Hungary's OTP Bank, for example, has been buying up companies and has announced
its intention to continue with this strategy.
Hungary mobile segment widens in October
Mobile phone subscriptions in Hungary rose by 0.32 per cent or 29,000 month on
month to 9.103 million in October, the National Communications Authority (NCA)
In terms of mobile subscriptions the market share of Vodafone rose by 21.19 per
cent in October from 20.92 per cent in September. The market share of Pannon GSM,
however, decreased to 33.73 per cent from 33.95 per cent and that of T-Mobile
Hungary fell to 45.08 percent from 45.13 per cent. In terms of subscriptions
actually generating traffic T-Mobile's market share was 45.42 per cent at the
end of the October, slightly down from 45.48 per cent a month earlier. The
market share of Pannon GSM slipped to 33.79 per cent from 33.86 per cent, while
that of Vodafone went up to 20.79 per cent from 20.66 per cent.
The NCA also published number portability figures for the mobile segment. There
were 4,663 numbers carried in October and 45,339 numbers carried in the first
ten months of the year. Since this service was made available in May 2004, a
total of 89,235 numbers were carried in the mobile segment.
Consortium wins tender for railway reconstruction
The reconstruction of the railway line between Nyiregyhaza, in northeast Hungary
and Zahony at the Ukrainian boarder has been announced. A consortium of Mavti
KHUF, Unitef '83 Rt, MSC KHUF and Ring Mernoki Iroda KHUF, has won a tender with
a bid of Euro 2.28 million, according to the latest issue of the Public
One third of the project's cost is being financed by the EU's Trans-European
Transportation Network (Ten-T) fund, which disbursed 50 million Euro alone last
year to new member states. Hungary received a fifth of the funding, which it
will use for five projects. In addition to planning the reconstruction, the
consortium must carry out an environmental impact study, plan for a new stretch
of rail line between the cities of Tuzser and Zahony, and obtain all of the
permits necessary for the reconstruction.