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Country Commercial Guides
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CHAPTER II. ECONOMIC TRENDS AND OUTLOOK
A. Major Trends and Outlook
The first six months of 1999 have been challenging for Hungary. The costs to the budget of heavy winter snow, spring flooding, and the Kosovo conflict have been high. Lower than expected inflation has hit nominal revenues as well. Thus the central budget has come under significant pressure, and the government's ability to meet its budget deficit target of 4 percent of GDP seems in jeopardy. With the addition of little significant new progress in major structural reforms, accompanied by an expected current account deficit nearing 5 percent of GDP, the Hungarian economy's strong performance of the last 4 years may seem to be waning. Reports of its demise, however, are greatly exaggerated. NATO's new member can still expect GDP growth of a respectable 3.5 percent or better this year. The picture of Hungary as a full partner with the family of democratic nations, rapidly converging on the EU, still accurately characterizes the situation on the ground.
Despite a challenging year and a difficult international environment, and assuming a relatively strong recovery in Western European economies, Hungary's fundamental strength as a fully functioning market economy provides it with the foundation needed to weather the turbulence. Nonetheless, fiscal probity will have to be the policy hallmark, along with continued efforts to reduce inflation, prevent deterioration in the external balances, and support the pro-investment policies of the past, while completing structural reforms, including taxation, public and higher education, health care, and local government financing.
Hungary no longer requires IMF financial assistance and has repaid all its debt to the Fund. Hungary's sovereign foreign currency debt issuance's carry favorable, mid-investment-grade ratings from all major credit rating agencies, with Moody's having announced an upgrade to Baa1 from Baa2 in early June. Hungary's currency, the forint (HUF), is fully convertible for current account purposes, and is managed by a pre-announced crawling peg devaluation foreign exchange regime. The current rate of monthly devaluation of 0.5 percent will be cut to 0.4 percent in October. Hungary became a member of the OECD in May 1996; is a founding member of the WTO; joined NATO in March 1999, and has been in on-going, substantive EU accession negotiations since March 1998.
* Although GDP growth is unlikely to reach the 1999 budget assumption of 4 to 5 percent, 3.5 percent or better is not out of the question. After 4.6 percent GDP growth in 1997, and 5.1 percent in 1998, 4 percent or more would finally bring Hungary back to its 1989 real GDP level.
* The 1998 consolidated public sector deficit was 4.7 percent of GDP, below the government target of 4.9 percent. When bank consolidations are added -- the last Hungary is likely to see in the medium-term -- the deficit was closer to 6.9 percent. The deficit reached 89 percent of the government's 1999 target of 3.95 percent of GDP in the first half of the year, making that target appear increasingly unreachable. The deficit, however, will not likely exceed 4.5 percent of GDP. The consolidated public sector gross debt stock continued to decline from an end-1993 level of 90 percent of GDP to 59 percent at the end of 1998, below the EU Maastricht threshold of 60 percent.
* After declining to a 20-year low of $987 million (2.2 percent of GDP) in 1997, the current account deficit widened in 1998 to $2.3 billion (5 percent of GDP). Exports grew by 20.4 percent in 1998 ($23 billion), while imports increased by 21.1 percent ($25.7 billion). Export and import growth of 10-13 percent, and 12-14 percent, respectively, are likely in 1999. Non-debt creating foreign investment is expected to cover the projected $2.5 billion deficit in 1999.
* The very high export growth and large privatization receipts of the last three years, which allowed for a rapid reduction in Hungary's debt load, are ebbing in 1999. Hungary will continue its careful handling of the now manageable debt burden to maintain favorable debt ratings and borrowing terms. Highly successful first quarter offerings in 7-10-year bonds denominated in Euros, dollars, and forints have been part of a strategy of lengthening maturities and diversifying currency risk.
* The inflation rate fell rapidly in 1998, from an annual average of 18.4 percent in 1997 to 14.3 percent, with year-on-year inflation of 11 percent in December 1998. Year-on-year inflation dipped to 9.1 percent in June 1999, and the government has credibly forecast 8-9 percent annual average inflation for the year.
* With about $19.7 billion in Foreign Direct Investment (FDI) since 1989, Hungary has been a leading destination for FDI in Central and Eastern Europe (including the former Soviet Union). Of this, over $7 billion has come from U.S. companies. The largest U.S. investors include Ameritech, GE, General Motors, U.S. West, Coca-Cola, Ford, IBM, and PepsiCo. Products at least partially produced by foreign-owned companies account for almost 75 percent of Hungary's exports. The industrial sector has received some 55 percent of FDI.
* Hungary stands as a model of telecom, banking and energy sector cash privatization. One-third of all FDI has come from privatization transactions. Majority share sales of state-owned assets are essentially complete; minority, blocking, and golden shares in major firms are next to go, and will proceed through the stock exchange. New infrastructure projects, such as the recently completed tender for the next generation, DCS 1800 MHz mobile telephone system (won by a UK-U.S. consortium) are also in progress. The private sector produces over 80 percent of GDP; foreign owners control 70 percent of financial institutions, 66 percent of industry, 90 percent of telecommunications, 60 percent of energy production, and 50 percent of the trading sector.
* A year of high volatility on the Budapest Stock Exchange (BSE) calmed in the first half of 1999, with the BUX index continuing its recovering from its late 1998 Russia-crisis crash to roughly 75 percent of its July 1998 record high. Some of the dynamism of 1997 seems to be back, and the BUX has steadily ticked upward in the second quarter. The BSE added a number of firms in early 1999, and should approach a listing of 65-70 firms by year-end. New privatization public offerings and growing investment from the 1998 pension reform should boost private savings as well as equity markets; with EU accession talks proceeding well, portfolio managers are looking to Hungary to be the next EU "convergence play".
* 84 percent of Hungary's exports went to OECD countries, 73 percent to the EU, in 1998. U.S. exports to Hungary reached roughly $440 million in 1998, up 10 percent over 1997. Hungary's exports to the U.S. increased 36 percent to about $1.5 billion. U.S. firms also account for much of Hungary's growing trade with the EU. Hungary is ranked 68th among U.S. trading partners. Primary U.S. exports include auto parts, computer equipment, films, videos, and CDs. Hungary exports primarily electrical machinery, machine tools, vehicles (non-railway), and organic chemicals to the U.S.
B. Principal Growth Sectors
The Hungarian government considers that Hungary could become a hub for regional transportation, informatics, and finance. The government's modernization plans stress this hub concept.
The following sectors are considered to have substantial growth prospects in the coming years:
* Telecommunications/Information Technology
The Hungarian Telephone Company (MATÁV) is majority owned by Ameritech (US) and Deutsche Telekom (German). The government sold most of its remaining shares on the stock exchange in November 1997. MATÁV will lose its long-distance monopoly at the end of 2001 and Hungarian and foreign companies are forming new telecommunications consortiums to compete in this lucrative market. Cellular companies, Westel (450), Westel 900, and Pannon GSM have mobile services available across Hungary. Although the telecom sector in Hungary was long underdeveloped, telecommunication services have significantly improved, and investment in value-added services, such as Internet access and VSAT, are underway.
* Services
Services, including financial services, advertising and retailing, represent a growing industry in Hungary. These are areas that only began developing several years ago and are now becoming more competitive and customer friendly. A new advertising law should increase revenues in this field, while services, as a whole should benefit from an expected increase in consumption in 1998.
* Automotive Industry
Major companies, including Ford, General Motors, Audi, Suzuki and United Technologies Automotive, have established multi-million dollar investments for auto-assembly and/or component manufacture. Equally important, these companies are expanding operations and manufacturing and seeking to use more Hungarian components. Hungary has targeted increased investment in this sector as a primary goal. While domestic demand for cars is important, the basic rationale for automotive production in Hungary continues: skilled and relatively low wage labor; an ever-increasing automotive supplier and vendor network; a stable economy; and a highly advantageous location.
* Food Processing
Hungary has an outstanding agricultural base but significant modernization is required in all fields including the food-processing sector. Formerly, food processing was functional and minimal, with little value-added. Given traditional strengths of Hungary in this field, an infusion of new technology could offer significant market take-off prospects.
C. Government Role in the Economy
Since 1989, the private sector in Hungary has grown from approximately 20 percent to over 85 percent of GDP. The socialist-led government of 1994-1998 accelerated the privatization process, with significant progress in 1995-1997, notably in energy, banking and telecommunications. Some 1,700 of 2,000 state-owned companies were privatized between 1989 and 1999, with another 218 firms still to go. The current government coalition intends to generate about $500 million in privatization revenues in 1999, through sales of state shares in power supply, textile, real estate, chemical, pharmaceutical, and broadcasting firms. The government has kept expenditures under 50 percent of GDP since 1997 and targets 45 percent of GDP by 2002.
D. Balance of Payments Situation
Hungary's balance of payments situation improved dramatically between 1994 and 1997, with the current account deficit declining from $4 billion to an exceptionally low $987 million over that period. The deficit widened in 1998, with the impact of both worldwide financial turbulence and an up-tick in the rate of growth of imports. The government projects a deficit of around $2.5 billion in 1999, or about 5 percent of GDP, which should be covered by non-debt creating foreign investment in-flows.
E. Infrastructure
* Motorways
Hungary's transportation infrastructure is relatively developed compared to other countries in the region; however, four-lane highways only cover part of the country. The Government has announced expansion plans that include linking all major cities with four-lane highways over the next seven years. In addition, Hungary has concluded preparation plans to build a European Corridor from Venice, Italy to Kiev, Ukraine, including Hungary. A BOT concession link on the M1 completed in 1995 reduced the trip between Budapest and Vienna to less than three hours.
* Railways
Hungary has an extensive railway system which links large and medium size cities. Approximately 158 million passengers and 43 million tons of goods are transported annually across 7,600 kilometers of tracks (of this 2,184 kilometers is electrified). Much of the tracks need to be upgraded to allow for faster trains. In addition, MAV, the Hungarian Railway Company, plans to modernize its ticketing system and management information systems, which will greatly improve overall efficiencies and operations of the railways.
* Air
Hungary's major airport, Ferihegy, is located in Budapest. The airport currently operates from two terminals. The completion of Terminal 2's expansion at the end of 1998 will double the airport's capacity. There is virtually no domestic air service in Hungary except a few services during the summer months. Some larger cities maintain airports for private aircraft and plans have been discussed for transforming former Soviet air bases into domestic passenger and cargo airfields.
* Telecom
Hungary now has a highly developed telecommunications system as indicated by segments of the country with 100 percent digital service, and the choice of 450, 900, or 1800 MHz mobile service. This level of service is in sharp contrast to the early 1990s when the installed base was 1.5 million lines and a penetration rate of 15 lines per 100 persons, resulting in a call completion rate of only 40 percent. Major investments by Ameritech and Deutsche Telekom in MATÁV has resulted in 200,000 - 300,000 new lines per year and a waiting period of less than one month compared to several years. In addition, customer service has considerably improved. MATÁV holds a monopoly on international calling into December 2001, at which time several companies are expected to offer competitive service.
* Utilities
Hungary has nearly privatized all its gas and electric generation and distribution facilities, reaching privatization levels of Great Britain. Foreign energy firms purchased power generation plants with the intent to modernize and expand capacities in order to meet new industrial demand as well as replace capacity from the retirement of obsolete plants. Approximately 43 percent of Hungary's electricity are generated by the Paks nuclear facility (state-owned), which hopes to double production by the year 2005. Gas and electricity price increases have risen progressively and are expected to reach world market levels.
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[end of document] Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title 17, United States Code.
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