Books on Hungary
% of GDP
Update No: 107 - (28/04/06)
Electoral cliff-hanger resolved
In Hungary, the second round of parliamentary elections on 23rd April decided
the fate of the current social-liberal government coalition, which secured a
slight majority after the first round. It was successful in the second round
too, only just - but enough so for it to be the first time since the fall of
communism that a government in Hungary has managed to get itself re-elected.
The irony is rich in that the dominant party in the coalition, the Socialist
Party, is the heir to the Communist Party no less. But then to make it richer
still they are led by one of the wealthiest men in Hungary, a mega-tycoon,
Ferenc Gyurcsany, who made his money in the early years by staying on the fence,
opting for the new mantra of democracy and capitalism, while remaining close to
the former communist power apparatus. Post-communist Hungary is an outré
Alice-in-Wonderland world, not ruled by the White Queen, but in which Humpty-Dumpty
Socialists Win Hungary's Elections
The ruling left-wing coalition then won the country's first parliamentary
elections since it joined the European Union in 2004. The Hungarian Socialist
Party and its liberal ally beat the centre-right opposition. There were
naturally scenes of great celebration at the packed Budapest headquarters of the
ruling Hungarian Socialist Party, which has made history.
For the first time since the demise of Communism in 1989 a Hungarian government
has been re-elected. Election officials said the Socialists and its liberal
coalition partner Alliance of Free Democrats are expected to have around 210
seats in the 386-member parliament.
The main centre-right opposition party Fidesz and the smaller right-wing
Hungarian Democratic Forum Party reportedly have 175. As soon as the results
became known, Fidesz leader Viktor Orban acknowledged defeat and congratulated
the Socialist Prime Minister on his victory. A victory of Fidesz seemed
increasingly unlikely from the moment that their leader Orbán withdrew his
candidature for the post of prime minister.
The putative post-electoral Socialist future
Mr. Gyurcsany told his supporters that his administration would create a
more equal society amid concerns over social tensions in Hungary, which joined
the European Union two years ago. "I believe in Hungary. I believe that we
can build up a Hungary that will be open for everyone and where it doesn't
matter where you are born in a small village or a town," he says. "We
want to create a country where it is worthwhile to work and where you can get
rich by using your talents and hard work."
The 44-year old Mr. Gyurcsany, a former Communist who became a self-made
millionaire before returning to politics, considers British Prime Minister Tony
Blair his political mentor. Mr. Gyurcsany's left-wing coalition has made clear
it wants to embrace globalisation and free market reforms while fighting for
While Western investors welcome the pro-business rhetoric of the Socialists,
there is growing concern over the ballooning budget deficit which stood at
around six per cent of gross domestic product in 2006.
The deficit is the highest within the European Union and is a threat to
Hungary's plans to meet the requirements to introduce the euro currency in 2010.
The celebrations were expected to be short-lived as some officials have already
spoken of massive lay-offs among state workers and other tough social measures
to reduce both the budget deficit and improve Hungary's competitiveness.
The problems are ahead
Whether the Socialists or Fidesz won, it was always going to be the same
question - the winner would face the daunting task of strengthening the
financial reputation of Hungary, damaged by the large budget deficit (6% higher
than allowed under the EU convergence criteria).
This in turn will determine the country's future introduction of the euro.
Hungary's accession to the euro zone is initially scheduled for 2010, but may
possibly be shifted to 2014, if the unstable economic situation prevails.
The following is an independent assessment made between the two rounds of the
Hungary struggles to compete
Hungary's ruling Socialists and the conservative opposition Fidesz are
locked in a close parliamentary election race, in which the role of smaller
parties may prove crucial.
It is the first such battle since the country joined the European Union in 2004.
The BBC's Europe analyst, Jan Repa, examines how Hungary has fared in the EU
compared with its neighbours.
When Communist rule ended in 1990 - the result, as in Poland, of a negotiated
transfer of power - Hungary enjoyed certain advantages. It had a cadre of
economic bureaucrats, many of whom had had training in the West. They understood
how banks and other financial elements of a market economy were supposed to
Much was made of the country's historic links with the German-speaking countries
- which were seen as a source of new investment and diplomatic support.
Domestic politics, however, revolved between two poles: a Western, liberal one,
based in Budapest; and a populist-national one, which emphasised Hungary's
The latter trend gave much publicity to the large Hungarian minorities living in
neighbouring Romania, Slovakia, Serbia and Ukraine: a relic of the time, before
1918, when Hungary comprised one half of the Austro-Hungarian Empire.
What all recent Hungarian governments have felt obliged to do is to feed
public expectations. This has produced recurring cycles of overspending,
followed by financial retrenchment and austerity.
The current election campaign has been no different - with the Socialists and
Fidesz both making promises of jobs, lower taxes and more state subsidies.
But they have not said what they will do about the budget deficit, which now
stands at over 6%, and may soon reach 8%.
Some foreign experts have suggested that Hungary will not be ready to adopt the
euro before 2014. The Socialists' target date is 2010.
While Hungary's annual growth rate of 4-5% is comparable with Poland it lags
behind the 6-7% currently enjoyed by the Czech Republic and Slovakia.
Hungary's finances, however, are in worse shape than any of its Central European
In fact, Hungary's economy - focused as it is on consumer goods and
agriculture - is quite vulnerable.
It lacks the size and internal market dynamism of Poland. Its reputation as a
manufacturing centre is not as well established as that of the Czech Republic.
Hungary's tax incentives are not as generous as those now being offered by
A number of foreign companies, which moved into Hungary in the 1990s, seeing it
as a fairly cheap assembly point close to the West European market, have pulled
out and taken their business to South Asia and other even cheaper locations.
Regional disparities persist in Hungary, with western areas, between Budapest
and the Austrian border, enjoying higher living standards than eastern areas,
closer to Romania and Ukraine.
Given their reputation for cleverness and effervescence, Hungarians have
maintained a surprisingly low profile in the European Union: unlike the Poles,
for instance, who have been accused of throwing their weight around in a manner
more usually associated with countries like France.
Size may be a factor. So may be a historical propensity to compromise and seek a
way through the conflicting ambitions of larger states.
Hungary may also be suffering from the after-effects of some rather clumsy
diplomacy in the run-up to EU membership, when it threatened several times to
put obstacles in the way of other EU-aspirant countries over the status of
These tactics did not go down well in Brussels, with the Hungarians being told
the EU did not like to get involved in bilateral disputes between members or
Hungary's central bank holds rates at 6%
Hungary's central bank recently held the interest rate at six per cent for the
sixth month in a row, in line with analysts' expectations. The bank's monetary
council said that although January tax cuts - the 25 per cent VAT rate was
reduced to 20 per cent - didn't cut prices as much as expected, medium-term
inflation prospects remained favourable, Deutsche Presse-Agentur (dpa) reported.
It added, however, that indication of tighter monetary conditions had become
more evident in developed markets, which - via a drop in risk appetite - put
pressure on emerging markets. The bank, however, hinted it would consider a rate
hike if Hungary's budget deficit is not addressed. "If changes in
international capital markets or the domestic equilibrium situation exerts a
persistent impact on processes determining the inflation outlook, we will take
this into consideration," the monetary council said in a statement.
MOL sells treasury shares to Magnolia
Hungarian oil and gas company, MOL, announced recently the sale of more than
six million treasury shares to Magnolia Finance Ltd. Magnolia, registered in the
British channel island of Jersey, would acquire 5.58 per cent of voting rights
on completion of the transaction, worth around US$560 million, according to a
MOL statement, New Europe reported.
The statement further said that Magnolia would issue perpetual exchangeable
capital securities to international financial investors. These would be
exchangeable into MOL shares between 2011 and 2016. According to the MOL
management, the sale was intended to finance expansion, though did not provide
any detailed outline.
Motorway company AAK gets 90bn forints bridge loan
Hungary's state-owned motorway firm AAK recently announced the taking out of a
bridge loan of 90 billion forints to finance motorway construction until it the
realisation of a planned bond issue. AAK said in a statement that a consortium
of banks led by Hungarian commercial bank MKB Bank would provide the
variable-interest loan, "which has no state guarantee and which would
expire on 30 June." "This way AAK has the necessary resources to
ensure the financing of motorway construction ... until the bond issuance,"
AAK said, adding that it would pay back the loan from proceeds from the bonds.
AAK announced earlier it was to issue Eurobonds worth 2.5 billion Euro to
finance motorway construction, New Europe reported.
MINERALS & METALS
Ferrexpo IT to build HUF 75bn rolled steel plant
Ukraine's Ferrexpo IT, one of the world's biggest makers of raw materials for
steel, plans to build a HUF 75 billion (300 million Euro) rolled steel plant in
Szabolcs-Szatmar-Bereg county in northeast Hungary, Deputy Chief Executive
Officer, Konstantin Zhevago, announced during a break in negotiations in
Nyiregyhaza on April 5th, New Europe reported.
Ferrexpo plans to start building the plant in the second half of 2006 and start
production by the end of 2008 or the beginning of 2009, Zhevago was reported as
saying. The plant will have the capacity to produce 2.5 million tonnes of rolled
steel a year, worth about one billion Euro and will employ some 1,000 workers.
Depending on the plant's performance, Ferrexpo IT could decide to invest a
further 200 million Euro in developments. Finance Minister, Janos Veres, who
participated in the negotiations as the government's representative, said talks
about the investment have been going on for a year, but have now entered into
the final phase when a decision on the location for the plant is expected to be
reached. Ferrexpo would choose between four possible sites in the county, he
said. Zhevago said Ferrexpo would set up a joint venture with Vorsklasteel,
owned by English and Swiss investors, to build the factory.
Hungary retail sales jump 6.7per cent year-on-year in January
Hungary's retail sales increased 6.7 per cent year-on-year in January, according
to preliminary data adjusted for calendar effects, the Central Statistics Office
The December growth data was corrected upward to 5.3 per cent from 4.9 per cent.
The month-on-month increase came to 0.7 per cent, according to figures adjusted
seasonally and by calendar effects. The month-on-month increase in December was
0.3 per cent. Retail sales in 2005 increased 5.6 per cent year-on-year compared
with 5.7 per cent year-on-year in 2004 and 8.9 per cent year-on-year in 2003.
Eurostat, the statistics agency of the European Union, estimated that retail
sales in the EU 25 countries increased 1.5 per cent year-on-year in January and
by 0.9 per cent in the Euro zone from a year earlier, according to figures
adjusted for calendar effects.
Magyar Telekom acquires Dataplex
Magyar Telekom Nyrt recently said it had closed the transaction to acquire
information technology services company Dataplex Kft, New Europe reported.
The financial closing of this transaction was carried out after they obtained
the approval from the competition office. On December 13th 2005 Magyar Telekom
concluded an agreement to buy a 100 per cent stake in Dataplex for HUF 5.113
billion. No change was made in Dataplex's management or business operations in
connection with the transaction, MTelekom was reported as saying.
PanTel to enter retail market
Business communication firm PanTel Kft entered the retail telecommunication
market in April, the company said recently, New Europe reported.
PanTel takes over 55,000 clients from Hungarotel Rt, with whom they are in the
same HTCC Group. HTCC aims to create more competition in the market and increase
its market shares from 10 per cent to 20 per cent. PanTel and Hungarotel are
also both eager to introduce Internet based television (IPTV) services to
Hungary. HTCC reported net revenue of US$110 million in 2005.