Books on Hungary
% of GDP
Hungary was part of the polyglot Austro-Hungarian Empire, which collapsed during World War I. The country fell under communist rule following World War II. In 1956, a revolt and announced withdrawal from the Warsaw Pact were met with a massive military intervention by Moscow. In the more open GORBACHEV years, Hungary led the movement to dissolve the Warsaw Pact and steadily shifted toward multiparty democracy and a market-oriented economy. Following the collapse of the USSR in 1991, Hungary developed close political and economic ties to Western Europe. It joined NATO in 1999 and is a frontrunner in a future expansion of the
Update No: 086 - (30/06/04)
Government survives EU ordeal
The Social Democratic Party-led coalition government did reasonably well out of the June 13th elections to the European Parliament. This was strikingly unlike governments elsewhere in Central Europe, notably in Poland and the Czech Republic, which might fall as a result.
The key campaign slogan of its rivals, the opposition FIDESZ party, was, unwisely as it turned out: "Those who stay away from the ballot on June 13th tacitly support the current governing coalition."
This was giving a hostage to fortune in no small way, much like Tony Blair with his WMDs in Iraq. The turn-out was always likely to be poor. Actually at 38.47% it was one of the highest in the EU, let alone among the entrant countries.
It enabled Premier Peter Medyessy to riposte to FIDESZ that the majority of the people, more than 60%, are by and large satisfied with the government's performance after more than two years. The Social Democrats ousted FIDESZ two years ago, but only by a slim margin of 188 to 178 seats won. They can expect a keen contest in 2006, when the next elections take place.
The EU results
FIDESZ actually did remarkably well in the circumstances. They secured 12 out of the 24 Europarliamentary seats allocated for Hungary in the 732-seat assembly.
The Social Democrats (MSZP) obtained nine, while their junior coalition partners, the Free Democrats, won two. The one remaining seat went to the junior opposition group, Hungarian Democratic Forum (MDF).
The extremists in the far-right Hungarian Justice and Life Party and the far-left Workers' Party failed to reach the 5% threshold necessary for representation in the parliament.
The meaning of the results
The government is, therefore, outvoted by 13 to 11 in terms of its EU representation. But this is a much better performance than any other ruling government has managed, mid-European and mid-term.
FIDESZ remains a formidable force, the likeliest winner of the next domestic elections. One piquant event was the election of a candidate from Lungo Drom Romany, its ally, who is a 29 year-old woman and mother.
Romany woman becomes the first Gypsy in the EU parliament
As the only Gypsy legislator in the European Parliament, Livia Jaroka says she has a big task ahead in promoting the often-discriminated group. "It seems that I'm going to represent Gypsies throughout Europe, not just Hungary," Jaroka told The Associated Press. "It'll be my job to stimulate dialogue between the majority society and Gypsy society."
When the European Union enlarged to 25 countries on May 1 to include Eastern European states, the number of Roma -- better known as Gypsies -- within the EU also increased significantly.
Between 7 million and 9 million Roma live in Europe, 80 percent of them in countries that have just joined or are due to join the EU over the next few years, according to World Bank estimates.
Most live in dire poverty and face discrimination in education, work and health care.
Jaroka's career is rare among Hungary's estimated 500,000 Roma, who make up about 5 percent of the country's population of 10 million. Unemployment among Roma is often five times higher than the average rate of about 6 percent, studies have shown.
Under EU pressure, the governments of Hungary and other East European countries have taken Roma issues more seriously over the past few years, says Brigid Fowler, a researcher at Birmingham University in Britain.
"Some Roma are worried that once the Eastern European countries are in the EU, the issue will come off the table," Fowler says. "The Roma want to continue to use the EU as a pressure factor."
While Jaroka's election is a step in the right direction, real change will only come when Gypsies are accepted into Hungarian -- and European -- society, says Dr. Gyorgy Ligeti, a researcher on Roma issues at the Kurt Lewin Foundation in Budapest. "When there are Gypsy taxi drivers, manicurists, computer programmers -- and not just entertainers -- in society, then a middle class can appear, which will naturally produce deputies and politicians," Ligeti says. "But Livia Jaroka's breakthrough may induce more young Romas to deal with politics."
Wizz Air gets 20m capital boost
American venture capital fund Indigo Partners LLC is to invest 20m in Wizz Air, Hungary's first budget airline, depending on certain technical conditions, the two companies said recently.
The transaction is expected to be closed by the end of July 2004.
Following this, Wizz Air will seek a further 20m capital investment, Jozsef Varadi, managing director of the airline said, the Budapest Business Journal reported.
The company is in negotiations with some of the seven European private equity funds that have expressed an interest in investing in Wizz Air, and will soon make a deal with one of them, he added.
"When these venture capital investors sell their stakes in Wizz Air, probably in three years, Wizz Air might go public," Varadi said.
Indigo Partners is a private equity fund focusing on investments in the air transportation sector. The fund is led by two air traffic and air transport investment experts, Bill Franke and Steve Johnson. Franke is a former CEO of US carrier America West Airlines.
"The fund was started in 2002. Its first investment was a new budget airline in Asia, the Singapore-based Tiger Airways. Wizz Air is the fund's second investment," Varadi said.
"Wizz Air's strategy is to concentrate on the Central European market, using smaller airports which charge lower fees for the airlines landing at them," he added.
Varadi is a former CEO of Malev Hungarian airlines Rt.
Wizz Air's first flight took off from Katowice, Poland on May 19th. The low cost airline announced recently that it would add four weekly flights to Brussels and three weekly flights to Stockholm to its list of flights starting in Budapest. This is in addition to the launch of 11 weekly flights from Budapest to London from June 24th, and daily services to Rome, Paris and Barcelona. Other destinations will be Athens, Prague and Katowice.
Ticket prices will range from Ft 5,000 to Ft 50,000, including airport tax, for a one-way ticket.
S&P affirms A-/A-2 foreign currency in Hungary
Standard & Poor's Ratings Services recently affirmed its A-/A-2 foreign current ratings and A/A-1 local currency ratings in the Republic of Hungary, New Europe reported.
The affirmation reflects Hungary's competitive economy, its moderate public sector external debt burden and external liquidity indicators. The outlook is stable.
"The ratings are supported by Hungary's competitive and well-diversified economy and export sector, the moderate external government indebtedness, and comfortable external liquidity ratios," said Standard & Poor's credit analyst Beatriz Merino. Nevertheless, the government faces the challenge of reducing the fiscal deficit and debt levels, and further reducing inflation.
Looking ahead, Merino said, "The government's commitment to reverse recent fiscal imbalances is expected to continue and should result in both the implementation of fiscal reforms and the reduction of the general government deficit and debt levels. Furthermore, expenditure cuts and tax increases approved in 2004 will facilitate keeping the general government deficit close to target. "Reducing the fiscal deficit in the medium term, however, will required the implementation of more profound fiscal reforms aimed at restructuring and reducing the size of current expenditures. Failure to pursue fiscal reforms, and complacency about large fiscal deficits - particularly ahead of the 2006 general elections - will put downward pressure on the ratings.
"In the medium term, good progress with fiscal consolidation and disinflation will increase the likelihood of early EMU membership, underpinning improvements in Hungary's creditworthiness."
S&P affirms BBB+ rating to Matav, outlook positive
Standard & Poor's Ratings Services said on May 28th that it affirmed its BBB+ long-term corporate credit rating on leading Hungarian fixed-line and mobile telecommunications operator Magyar Tavkozlesi Rt (Matav), New Europe reported recently. At the same time, the rating was removed from Creditwatch, where it had been placed on March 10th, 2004. The outlook is now positive. The rating action is in line with that on Matav's majority shareholder Deutsche Telekom AG (BBB+/Positive/A-2). "DT holds a 59.2% stake in Matav, which creates significant rating linkage between the two companies. The rating on Matav will continue to factor in this ownership and should move in step with that on DT for as long as the company is considered a strategically important investment for DT," said Standard & Poor's credit analyst Michael O'Brien.
Matav is Hungary's former telecoms monopoly, and it continues to have a dominant market share in its key businesses (fixed and mobile telephony and internet). This provides substantial and relatively predictable revenue streams and profits. In addition, the company has a high 47.6% market share in the three-player Hungarian mobile market, as at April 2004, through its fully owned mobile subsidiary T-Mobile Magyarorszag Tavkozlesi Rt (T-Mobile Hungary).
The Matav group has also benefited from certain operational and management synergies with DT, most recently in connection with the re-branding of Westel to T-Mobile Hungary. At March 31st, 2004, the Matav group had lease-adjusted net debt of HUF 285bn (US$1.4bn). Although the Matav group's profitability and cash flow generation remain solid, free operating cash flow dropped in the first quarter of 2004 by 26.6% year-on-year to HUF 17.2bn, primarily due to lower EBITDA (earnings before interest, taxes, depreciation and amortisation) driven by fixed-line competition and a higher working-capital outflow.
Nevertheless, the company has further reduced its lease-adjusted net debt since the end of 2003, by 5% to HUF 285bn (HUF 277bn non adjusted), giving a lease-adjusted net debt-to-EBITDA ratio of about 1.2 for the 12 months ended March 31st, 2004. The company will pay higher dividends on the 2003 results of HUF 72.2bn compared to previous years, which will be mainly financed by a shareholder loan from DT. "Although we consider that borrowing to pay dividends is aggressive, comfort has been gained through DT's continued provision of financing, when necessary, and through the support provided by Matav's cash flow generation," O'Brien continued.
Demasz results fall short in Q1
Hungarian power utility Demasz, controlled by Electricite de France, posted net income of HUF 1.12bn in the first quarter of 2004, New Europe reported recently.
The result is slightly below average expectations of a HUF 1.2bn bottom line, but exceeds net income in the base period by 3.6%. Both revenues (HUF 19.79bn) and operating profit (HUF 1.68bn) came in above forecast levels. However, interest expense grew three-fold compared to a year earlier, to HUF 380m. The company was hurt by a 5% drop in household power consumption due to a milder winter, CFO, Gabor Lehoczki, told reporters.
MOL reports record profit
Oil and gas company MOL Rt claimed record profits in its 2004 first-quarter earnings report released recently, the Budapest Business Journal reported.
The natural gas business contributed much to profit as did the favourable forint/US dollar exchange rate and a high oil price, according to analysts. They said shares of MOL, which are listed on the Budapest Sock Exchange Rt (BRT) are currently undervalued.
MOL's net income rose to Ft 51.9bn (205m) from Ft 22.8bn in the first quarter of 2003. the rise in profit in the natural gas division was the main driver. The firm said it was able to increase prices to industrial users, while the mild winter put a break on unprofitable household use.
"The sales price of natural gas finally exceeds purchase costs," said Gyorgy Mosonyi, co-CEO of MOL, speaking at a press conference in Budapest. "This is a significant change, this is what primarily brought about the drastic earnings improvement."
Kornel Sarkadi Szabo, analyst at Raiffeisen Securities Rt, said that results were in line with his projections, but that the performance of the gas division was a pleasant surprise.
"The performance of the gas business is great from MOL's point of view," he said. "It's fantastic to post record profit in this sector, as it plans to sell the gas until later in the year."
MOL recorded an Ft 20.9bn operating profit at its gas unit, compared with a loss of Ft 2.3bn in the first quarter of 2003. The average import price of natural gas was unchanged, while MOL's average selling price rose 45%.
The company put stakes in its gas storage, transport and wholesale businesses up for sale in February, valued at a combined US$1.4bn.
Tamas Plester, an analyst covering MOL for Erste Bank Investment Rt, said the report was very strong and contained no negatives. He added that the high oil price and strength of the forint in the period helped results, and that wider margins on refining also contributed.
"The refinery business was very good, and the strategy of buying Slovnaft is now bearing fruit," he said, referring to the excellent performance of MOL's wholly-owned Slovak subsidiary.
According to Miklos Bonis, head of research at Inter-Europa Bank Rt, refining contributed some Ft 25bn to operating profit, a 70% rise on the same period last year. The main reason was the consolidation of Slovnaft, he said.
He added that the forint's strength helped the financial result, with MOL posting Ft 11bn in profit on FX gains on its forint currency-denominated debt.
Environmental market to boom post-accession, says new player
UK-based environmental sciences firm CL Associates is in the process of setting up a Hungarian subsidiary, executives of the company said recently, the Budapest Business Journal reported.
The firm, which is a member of Mowlem Environmental Sciences Group (MESG), is the UK's leading geo-environmental consultancy. It provides specialist assessment, design and advisory services to private and public sector clients.
According to Peter Gee, EU accession will give a new momentum to Hungary's environmental services market.
"Environmental services are expensive, so many individuals and firms tend to push these issues aside for as long as they can," Gee said. "But Hungary's recent EU accession means that legislation will drive environmental Service providers, over 2,000 companies compete on Hungary's approximately Ft 300bn environmental market. Of these firms, approximately 1,500 have only two or three employees.
Gee declined to disclose the identity of CLA's clients in Hungary. He only said that some of them are already operating in Hungary, while others plan to come in the future.
Gee also declined to make a revenue forecast for 2004.
Operating with 23,000 employees, MESG had turnover of £45m in 2003. The group has over 500 technical staff.
Through CL Associates, clients in Hungary will have access to all of the services offered by the group, including soil mechanics services, food and microbiological testing, environmental remediation, waste management and environmental consulting and audits.
The company also offers a complete Integrated Pollution Prevention and Control (IPPC) service for the waste management sector. This includes preparation and submission of IPPC applications for this sector.
The EU's IPPC standard, which will be applied to most of Hungary's industrial producers in several phases by late 2007, will require firms to specify what is the best available technology (BAT) for their activities. After getting approval from one of Hungary's 12 regional environmental supervisions, they will then have to adjust their production systems to the new requirements.
Compliance with the IPPC will cost the 1,000 Hungarian affected companies about Ft 450bn, according to an announcement made by Robert Rakis, deputy state secretary of the Environment and Water Ministry.
Bosch Group first recipient of government investment subsidy
Announcing a 150m three-year program of investment in Hungary running up to the end of 2006, Robert Bosch GmbH recently became the first beneficiary of a new investment incentive scheme, whereby the government will provide a subsidy of some 10% of the total amount invested, the Budapest Business Journal reported.
The news of the Bosch investment was announced by Economy and Transport Minister, Istvan Csillag, a day after preliminary investment data for the first quarter of 2004 showed a strong upswing in FDI.
Under its new scheme, Csillag said that the government provides special subsidies for investments of over 50m, noting that the subsidy system is compatible with all EU subsidy regulations, and the majority of EU member states offer similar levels of support to industry.
Bosch will invest 100m of the total 150m in 2004, Csillag said at the press conference to announce the project, meaning that Ft 2.5bn (approximately 10m) investment subsidy will be paid by the government this year.
The investment will involve the Bosch Group enlarging its existing facilities in Hatvan, Eger and Miskolc, all in eastern Hungary.
Over the course of the three-year investment program, the development project in Miskolc will cost a total Ft 15.5bn, while the cost of the Hatvan development will be Ft 18.2bn. The construction of a pneumatic parts production facility in Eger will total Ft 4.1bn, Csillag said.
Internationally, Bosch is the world's second largest maker of car components. Bosch makes electric power tools and electric parts for cars in its Hungarian factories. Currently, there are 11 Bosch Group members producing and distributing the group's products in Hungary.
According to Lajos Gredinger, managing director of local unit Robert Bosch Kft, the group's sales and production in Hungary totalled 265m, while total investments of member companies amounted to 160m at the end of 2003.
Also recently, the Bosch Group hired its 3,000th Hungarian employee at its facility in Miskolc.
Asked why Bosch had chosen to make the investment, Gredinger cited the well-trained workforce as the most important reason the company came to Hungary, adding that the quality of Bosch's Hungarian workforce was on a par with its facilities in Sweden, France and Germany.
Bosch Kft spokesman, Robert Raveczki, added that the available subsidy was not the only reason for the investment.
"The flexibility of the labour force, plus the harmonisation of infrastructure and transportation development in Hungary, plus the existence of several large car manufacturers, were all important factors in the decision," he said.
Matav suffers weak quarter
Matav Rt, Hungary's leading telecom and the second largest phone company in the CRR region, recently announced its first quarter profit had fallen 26% year-on-year, mainly owing to declining revenue from its fixed-line business, Budapest Business Journal reported.
Overall, profit fell to Ft 14.1bn (55.7m) form Ft 19m in Q1 2003, and analysts say that the trend is set to continue.
"This report was in line with our expectations," said Kornel Sarkadi Szabo, lead analyst at Raiffeisen Securities Rt, adding that the only question concerning Matav as an investment is how the market appraises the company's dividend policy. He explained that investors see Matav as a quasi fixed-income instrument, betting on dividend payments rather than a share price growth.
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