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: 084 - (29/04/04)
Bi-anniversary goes well
The new prime minister of Hungary, Peter Medgyessy, was revealed to be a former communist secret agent, within weeks of his election in April 2002. Two years on it has made surprisingly little an impact.
The news had the effect of a small bomb for a while on the Hungarian political scene. Medgyessy, who many in the press had previously cast as a gray banker and a technocrat, had only started work on May 27, 2002, after tight elections that left the Socialist Party (Magyar Szocialista Párt, or MSZP by its Hungarian initials) dependent on an uneasy coalition. To make matters even more difficult for the new prime minister, the Free Democrats (Szabad Demokraták Szövetsége, or SZDSZ), whose 20 votes give the Socialists their 10-seat majority, had a rocky relationship with the communist regime's security forces and were already hesitant to join a coalition with the Communist Party's direct political descendents.
Moreover, the elections that brought him to power were particularly polarizing. In the June 17 edition of the liberal Budapest daily Népszabadság, two months after the polls closed, journalist Tibor Tamás was still writing about the acrimonious debate surrounding the election. The story followed street demonstrations, some of which were forcibly dispersed with teargas, that led Hungary's courts to consider the question of a recount. This did not in the end happen.
Although he at first denied the story, Medgyessy later amended his account, admitting that he had been a counter intelligence operative for the Interior Ministry from 1977 to 1982, protecting-he says-Hungary's economic secrets from spies from other Warsaw Pact signatories, who were seeking to scuttle Hungary's ultimately successful bid to join the International Monetary Fund (IMF).
The government has had a rough ride for all the absolution given to Medgyessy. Hungary used to be the miracle economy of Central Europe, attracting a lion's share of its foreign investment. But that has all changed in the new millennium.
For the economies of Central and Eastern Europe trying to catch up after almost half a century of communism, it was difficult. Foreign investment poured in, while privatisation got rid of the old and brought in the new (regardless of whether the old worked and the new didn't). On paper, most countries of the former East Bloc experienced high growth, with those closer to the EU and not involved in an armed conflict (i.e., Poland, the Czech Republic, Hungary, Slovenia) averaging around 5% annual growth. Indeed, for a long time Hungary was at the forefront in terms of the amount of foreign investment pouring into the region, reaching $20bn in the later 1990s.
Yet with the turn of the millennium and the region's inevitable march toward membership within the EU, there has been a change. At first it was slow, but now it is more apparent. No longer can foreign investment be taken for granted, and much of what could be privatised has been sold away. A "new" economy has taken hold in the former East bloc, and it has begun to spread worry among people and politicians alike.
The flight of capital eastwards
Nowhere is this more clearly illustrated than in the corporate flight eastwards, usually to China, but sometimes just across the border to Romania, Bulgaria, or the Ukraine. Hungary has already experienced some high-profile capital flights, but the latest decision by Philips last year to join the pack has once again raised questions and concern as to what lies ahead.
Five hundred workers have lost their jobs at the the Philips CRT monitor plant in Szombathely, western Hungary. It was the third major closing in the area, and was yet another in the nation-wide tide of corporations fleeing eastwards. The electronics company, like many others, is shifting its production further eastwards to China. Philips said the move was because the price of CRT monitors had dropped significantly, in part because flatscreen LCD monitors have become more popular. The company added that the decision to relocate was not because of the Hungarian economy, but because of bad economic conditions in general. According to the corporation's PR manager, "being a global company we have to remain competitive, and in China we have found cheaper and more economical production possibilities."
The company promised to help relocate workers. Some are being transferred to the Philips monitor plant in Gyor. As for the rest, the company has consulted with union and regional officials. Naturally, the role of unions in post-communist Hungary is not to fight for worker's rights, but to help ease the pain of globalisation. The government, meanwhile, is at a loss of how to cope with this latest eastward migration of corporate capital. As a result, it has resorted to doubletalk. In response to the Philips move, the employment minister, Peter Kiss, had this to say:
"It's good news and bad news. Good news because the kinds of production that is coming to Hungary will be long-term, high-skilled, and highly-paid; the bad news is that where jobs are lost, it causes difficulty."
Actually, Hungary needs to find a new role. Entry into the EU as of May 1st should help to concentrate the mind wonderfully here.
An-26 aircraft to perform ambulance tasks
The An-26 aircraft of the HDF Air Force equipped to perform ambulance (Medevac) tasks was recently introduced at the Dezso Szentgyorgi airbase, New Europe reported recently.
After the ground display, the Szolnok-based aircraft took off for an approximately two-hour route flight, with several medical experts aboard, who were able to assess the aircraft's equipment and deployability during the flight, while after landing they took part in a professional discussion to change opinions about what they had seen, and to make proposals for the necessary modifications. The cargo space of the An-26 can be converted to perform ambulance tasks within an hour.
EasyJet unveils 3rd route from Budapest to EU cities
Europe-wide budget airline easyJet recently announced its third route from Budapest - the first flight from the Hungarian capital will take place after the country's EU accession. In addition to its previously announced flights to London Luton from the day of accession and a Budapest-Berlin route to launch on June 17th, easyJet will operate a daily flight to Dortmund, in Germany, beginning on September 16th, CEO Ed Winter, said at a news conference. Tickets will start at €18.99 one way, Interfax News Agency reported.
The airline predicts a significant boost on the volume of traffic on the Budapest-London route after the entry of easyJet as a budget provider. From annual traffic of under 350,000 passengers between the two cities in 2003, the company forecasts over 600,000 by 2006. "Our model has proved to be very accurate," Winter said. The easyJet model is based on current traffic levels, current fares and the catchment area of the airports, he noted. The airline is little affected by the recent ruling on airport subsidies by the European Commission with regard to Ryannair at the Brussels Charleroi airport, Winter stressed.
EasyJet does not base its business on airport subsidies, but on achieving positions at airports where it pays only for what it uses. "We don't need lounges, or marble, or glass hallways," Winter explained. "We've made a leap of faith by putting in three services before opening in Budapest," Winter declared. "But to expand further, we'll need to be sure our cost base is going forward." The airline sees the potential for 8-9 flights from Budapest per day.
Terminal 1 at Budapest's Ferihegy airport is ideally suited for budget airlines, and easyJet would like to gain access for its own flights, Winter said.
However, plans regarding the terminal are unclear, and there is uncertainty surrounding a renovation programme for the terminal. EasyJet understands it will need to operate a Terminal 2 or 2B for a time, according to Winter, while waiting for the long-term renovation of Terminal 1.
"We're happy to operate at either in the short term." Terminal 1 was closed for a time, and commercial flights from Budapest used only the modern Terminal 2A and 2B.
Terminal 1 was reserved for certain NATO flights for a time, and has now been re-opened to commercial traffic, being used by budget carriers such as German Wings. However, Winter told Interfax that in its current condition, Terminal 1's capacity is only one flight every two hours.
Volksbank Hungary reports HUF 256m profit for 2003
Magyarorszagi Volksbank Rt, a subsidiary of Austria's Volksbank International AG, closed 2003 with a pre-tax profit of HUF 256m (US$1.14m), up from HUF 112m in the previous year, Chairman, Laszlo Balazs, announced recently, New Europe reported.
The bank increased its total assets by 30% to HUF 152bn by the end of 2003, on the back of dynamic lending growth. The net loan stock grew 46% to HUF 108.5bn, while the stock of deposits expanded 25% to HUF 73.16%. For 2004 the bank plans modest growth, with pre-tax income expected at above HUF 500m, while total assets are planned to grow to HUF 163bn. The loan stock is expected to grow to HUF 119.9bn, while the stock of deposits is seen at HUF 83bn. Following investments of HUF 1.5-2bn last year, mainly in expanding the branch network and IT upgrades, Volksbank plans investments of HUF 2-2.2bn this year, Balazs said. Of this, HUF 1bn will go toward overhauling the bank's headquarters, and another HUF 1-1.2bn on further IT developments.
Nabucco pipeline consortium founds project company - MOL
The partners of the Nabucco consortium, including Hungary's MOL Natural Gas Transmission Company Ltd, have established a project company to develop a financial model for the construction of the Nabucco pipeline, Austria's OMV announced recently. Nabucco Company Pipeline Study GmbH will be based in Vienna.
The pipeline, which could start deliveries as early as 2009, is planned to bring natural gas from the Caspian Sea region to Europe. Members of the consortium are Botas, Boru Hatlari ile Petrol Tasima AS (Turkey), Bulgargaz EAD (Bulgaria), and SNTGN TRANSGAZ SA (Romania) - in addition to MOL's gas transmission subsidiary and OMV Erdgas GmbH.
The Nabucco pipeline will be an important alternative supply of gas for Hungary and for Europe, OL spokesperson, Bea Lukacs, said, New Europe reported.
The Nabucco consortium was founded in October 2002 to research a natural gas pipeline connecting the Caspian region and the Middle East with Europe. The company will be led by managing director, Reinhard Mitschek, who will be supported by five senior representatives from each consortium partner.
The company will develop the financial model for construction, design appropriate incentives for investors, coordinate marketing activities, and enter into negotiations on transportation contracts with potential shippers, OMV said.
With the establishment of the company, substantial progress has been made towards a Nabucco feasibility study, the statement stresses. The parties also signed a contract with the technical general subcontractor to study all issues concerning the design of the new pipeline route, which will accelerate the decision making process.
Interim reports show very promising results, and highlight the need for the pipeline. The major phases of the study are scheduled to be finalised by the end of this year.
The new pipeline route will increase the importance of all countries involved in gas transit to central and western Europe, the statement stresses.
Meanwhile, MOL, informed talks for a future merger with its Polish counterpart PKN Orlen, is mulling possibilities for a floatation of shares on the Warsaw Stock Exchange (WSE). MOL executives have met with officials from Poland's securities regulator KPWiG recently to probe market opportunities, Poland's Securities and Exchange Commission KPWiG spokesperson, Michal Stepniewski, said. "MOL has had some meetings in Poland with financial institutions and is asking about possibilities and some details," Stepniewski said.
MOL remains far from a decision, a fact which both Stepniewski and MOL officials stressed. "We are analysing the possibility of increasing the liquidity of our shares. One possibility is to be on the region's bourses," Lukacs said.
General Electric selects Budapest as HQs base
Budapest has been chosen as the European, Middle Eastern, Indian and African headquarters for a new General Electric business called GE Consumer & Industrial, The Budapest Sun reported.
The new division, headed by Ruben C Berumen, comprises some 26,000 employees in the four regions, with a total annual revenue of US$1.6bn, offering domestic and industrial low voltage electrical power protection devices, lighting and domestic appliances.
GE Consumer & Industrial was officially created on January 1st, 2004 as part of a significant restructuring of the total GE company. It is part of a major move to simplify the organisation and create growth. The GE Consumer & Industrial business combines the former GE Consumer Products and GE Power Controls business into a single management and operating structure.
Hungary has been a major GE lighting technology centre for more than a decade. GE was the first multinational to set up a technology centre in Hungary, building on the long standing expertise that has accumulated since 1921, when Europe's first applied research centre was founded in Hungary. GE currently employs 14,000 Hungarians.
"Technology and innovation are the heart of GE's global business strategy and with the two technology centres - Lighting and Healthcare - operating here, Hungary contributes to this global effort," National Executive for Hungary and Chairman of the Board of GE Hungary Rt, Istvan Szini, commented.
Hungarian, Romanian premiers discuss EU accession
Romania is capable of closing accession negotiations in 2004 and of joining the European Union in 2007, said Hungarian Premier, Peter Medgyessy, after meeting Romanian Prime Minister, Adrian Nastase, in Brussels, Rompres News Agency reported.
"We know that the Romanian government is resolved to meet all the accession criteria this year and the government has the power to attain this aim," said Peter Medgyessy, who added that Hungary was ready to help Romania by offering it its expertise in the accession negotiations. Romania's joining the EU is important for Romania and Hungary and the union, said the head of the Hungarian government, who made it clear that he was convinced that 2007 would be the year for the Romanian state's accession to the European Union.
In this context, Peter Medgyessy emphasized the fact that changes and reforms required sacrifices that have to be accepted, as the benefits of the European integration were much higher. Romanian Prime Minister, Adrian Nastase, remarked on the fact that the meeting between him and his Hungarian counterpart was held, for the first time, at Hungary's diplomatic mission in Brussels and added that this was an important signal given for the new direction of the relations between the two states, which is oriented to the future and leaves the problems of the past behind.
EPAM Systems buys Fathom software firm
Russian software services and solutions firm EPAM Systems Inc has acquired local software specialist Fathom Technology Kft last week, in a deal that will create the largest software engineering services provider in Central and Eastern Europe, Budapest Business Journal reported recently.
The deal was closed in mid-March. Payment will take place through a share transfer, whereby Fathom's owners receive stakes in the new company, which will retain the EPAM name.
"The strong US presence and large number of experienced, high-quality engineers brought by EPAM will result in a higher level of service and greater efficiencies for Fathom's customers," Karl Robb, CEO and co-founder of Fathom, said recently.
Robb said half of Fathom's business is in the US, which has put a big strain on managers who have had to make frequent trips there.
EPAM has 50 people there, and now Budapest can concentrate on being a development centre," Robb said.
EPAM has over 600 staff, located in Russia, Belarus and the US. For its part, Fathom has 160 staff in Budapest.
Having experienced continued growth since 1993, this is the next phase of EPAM's strategy to become a premier global software services provider," said Arkadiy Dobkin, CEO and president of EPAM, commenting on the deal.
EPAM's size, technical excellence, cost-effectiveness and leadership in quality processes mean that the deal could bring major offshore outsourcing deals to the local company, Robb said. It will be a significant competitor to the so-called "Tier 1" offshore suppliers, such as companies in India that are traditionally strong in this field," he added.
"Strategically, we'll we have the ability to compete with India. To get big deals, you've got to have the numbers, financials and team size to back you up," Robb stressed.
None of the original Fathom shareholders are exiting their ownership stakes, but they will take shares in the newly merged company.
Investors include individuals such as Esther Dyson, Andreas Kemi, Mike Simon, Alex Dembitz, and Robb himself. Venture capital fund manager Euroventures BV is the largest investor, having put in €900,000. Since Fathom was founded just over three years ago, about $2m has been invested.
Euroweb International buys Elender for US$9.5m
The Budapest Business Journal has reported that Nasdaq-listed Central and Eastern Europe ISP Euroweb International Inc has bought 100% of fellow ISP Elender Business Communication Rt in a deal that will bring considerable synergies and widen Euroweb International's portfolio, executives announced recently.
Elender will be merged with Euroweb Hungary Rt, the existing local subsidiary of US-registered Euroweb International.
"This will create the largest independent ISP in Hungary and its largest corporate ISP," said Euroweb International CEO, Csaba Toro.
The purchase price is US$9.5m, with US$6.5m paid in cash. The other US$3m is being transferred in the form of Euroweb International shares issued to Elender's previous owners. A total of 667,201 shares with a value of US$4.43 per share have been issued to those owners. The deal is subject to approval from the Competition Office.
Prior to the buyout, financial investor Wallis Rt owned 77% of the company, Elender's CEO, Janos Koka, along with Elender founder, Gyula Lepp, owned a combined stake of 23%. The share issue will give those former Elender owners a 13% stake in Euroweb International.
"As a proportion of the deal is done through the exchange of shares, it gives us another opportunity to increase its value," said Koka. "We'll see how it develops, and [the other shareholders and myself] will work out whether to increase, decrease or hold in the future."
Koka will be the CEO of the new Hungarian company, the name of which has not been announced. He will also serve on that company's board, representing minority shareholders.
Gordon Bajnai, CEO of Wallis, expressed enthusiasm for the deal. "Elender has been a very successful investment for us. We believe there is remaining value growth in the business through the consolidation," he said. "This is the best way to secure our investment on a very difficult market."
He added that Wallis shares the views of the Euroweb shareholders about the consolidation. "We needed to take this step. The consolidation will help the management build a new presence," Bajnai said.
Koka said the deal is being carried out at a fair market price.
Along with the purchase, Euroweb International will take on a US$1.4m loan to Elender made by its former shareholder, the now defunct PSINet Europe Inc.
The acquisition, together with the recently completed purchase of outstanding shares of Euroweb Hungary from alternative telco Pan-Tel Rt, will bring Euroweb International expected revenues of approximately US$43m on an annualised basis starting Q2 2004, said Toro. He added that this is an increase of 300% compared to the previous year.
Toro added that Euroweb International's product portfolio will be greatly enriched. Euroweb Hungary's international voice services through its NeoPhone service, and its free residential internet services and paid-for residential broadband ADSL internet, will be supplemented with Elender's internet for schools and complex ASP, web and consultation services, he said.
Elender provides internet to 2,300 schools under the Sulinet program. Euroweb subsidiary Freestart has 80,000 internet users.
"We are also getting ready to offer NeoPhone in Romania and Slovakia," said Toro. He explained that it is Euroweb International's strategy to establish services in Hungary first, then introduce them to Slovakia, Romania and the Czech Republic, the other countries where it has subsidiaries.
"We might take the same approach with Elender's web services," he said.
"By combining, we will create an entirely new set-up," Koka commented. "We will be large enough to bring about reduced telecom rates and undercut the impact of telecom monopolies in Hungary."
Kriszta Hollo, strategic advisor at Euroweb, affirmed that all the money for the Elender buyout is coming from existing funds.
"We still have reasonable reserves left, with which we can start to take further steps," she said.
Toro said Euroweb International is looking to make add-on acquisitions and will consider using the stock exchange to raise further capital.
Toro was previously CEO of PanTel, and, on leaving that position, was part of a consortium that made a bid for PanTel. The bid was rejected. Recently, Toro declined to say whether Euroweb International is targeting PanTel.
Wallis' Bajnai said PanTel is not on Wallis' target list, but did not rule out the possibility.
"We're a pragmatic investor. We never say never," he said.
Toro said Euroweb is not likely to buy into Hungary's second largest web portal, Index.hu, which is 35% owned by Wallis. He said it falls outside Euroweb International's core activity.
Nevertheless, there is likely to be some cooperation with Index.hu, according to Koka.
In 2003, Elender and Euroweb Hungary recorded revenue of Ft4.7bn and Ft1.9bn respectively (about €18m and €7.5m), with EBITDA of Ft411m and Ft91m. Elender's revenue dipped slightly compared to 2002, while Euroweb Hungary's rose.
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