Hungary - Raising the curtains

(column by Sankalp Bhattacharjee)

Just as long drawn economic reforms are beginning to materialise, the country is becoming more open to the world. Today, Hungary is quite liberal towards trade, investments and also bilateral relations. And this throws open a galore of opportunities. It’s time for India to brush up its past relations and cash in on the investment vistas that the ‘Pearl of the Danube’ has to offer...

The legendary Hungarian hospitality has over the decades drawn connoisseurs to its heritage of pristine architecture and stunning scenic beauty. With a galore of historical artefacts ranging from ancient Roman ruins to magnifycent churches & palaces, awestruck beholders can feel the rich history flowing in their veins. Even nature has blessed the land with the spas, springs and lakes that justly earns its capital the title of ‘Pearl of the Danube’. But as is the norm with most blessed lands, the balance is drawn when it comes to the economic prosperity of its people. And this country too, after suffering throes of economic hardships is now retaliating with a new fervour under the resilient leadership of Prime Minister Ferenc Gyurcsany. One may give the credit to the premier whose visions have paid off . Now the country seems to be back on the growth trajectory and boasts of openness like never before. Hungary’s accesssion to European Union (EU) will further fuel liberalisation of the economy and open new doors to the world. There’s a lot that the country has to offer and Indian businesses and entrepreneurs should not ignore Hungary’s call.

A‘maze’ing Past
The labyrinth of past that has formed Hungary as we know it today is one of the most colourful ones in the world. Hungary witnessed numerous reforms, expansions, disintegrations and devastations by various empires, be it the Tartars or the Turks, the Habsburgs or the Russians. The country in the later half of the 19th century witnessed growth of Industrialisation and slide of agriculture which led a fury amongst the suppressed commoners. Subsequently, this fuelled unrest in 1918 when the nationalists inspired by the Russian revolution of 1917 sought for independence. And on November 16, 1918 Count Michael Karolyi, Prime Minister to Emperor Charles I, declared Hungary an independent republic and marked the beginning of communist rule in the country. But political & diplomatic issues of this era pushed the country into economic misery, thereby compelling the nation to look westward for trade. Hungary opened itself to the world by opening its borders with Austria in 1989, when both the countries ceremonially removed the ‘iron curtain’ separating them. In 1990, under the leadership of Prime Minister Josef Antall liberalisation got further impetus. Antall sought economic liberalization through reforms, which included freedom being given to the press & private businesses along with changes in the election processes. In the same quest Hungary joined the NATO in 1999 under Prime Minister Viktor Orban of the conservative Hungarian Civic Party. In May 2004, Hungary joined the EU (partial integration).

Economy: Slow But Steady
The transition of the Hungarian economy from being centrally planned to an open market has reaped dividends for the country. The nation has been registering GDP growth rates of around 4% which is double the average of the EU. The growth is driven by the services sector, which accounts for 65.1% of GDP followed by the industrial sector, which contributes 31.2% & agriculture a paltry 3.7%. On the trade front, machinery & transport vehicles contribute over 60% of the total exports, while pharmaceutical and chemical products make up a further 28% of goods. In imports, machinery equipment make up 51% of the imported items, with Germany accounting for 26.8%, Russia contributing 7.5% & China 7.2% of imported goods.

Hungary’s economic liberalisation, becoming a part of the EU and a member of OECD – has shown tangible results and all of it is evident from the amount of foreign investments fl owing into the country. Global corporations like GE, Electrolux, Ericsson, Audi, Samsung et al are competing for their share, of what seems to be opportunity, worthwhile exploring. The Hungarian government has exploited the opportunities to its fullest, propelling the net FDI inflows into the country to €5.3 billion in 2005. Services & industries like the electric machinery, automotive, and chemical are currently the major recipients of foreign capital.

On the other hand, Hungarian companies too have been proactive in seeking greener pastures beyond the EU in Latin America & Asia. Banking group OTP and hotel operator Danubius are the latest to set footprints abroad after the Hungarian pharma giant Richter Gedeon, which acquired 51% stakes in Polish drug company Polfa Grodzisk for $31 million taking the total outward FDI of Hungary to $337 million in 2005 (UNCTAD).

But still, there are certain challenges facing the economy and the country. The biggest challenge and an impediment to Hungary’s complete integration into EU is its budget deficit. Hungary’s budget deficit for 2006 is expected to hit 10.1% of its GDP – the highest in Europe. The European Commission has till now stood beside Hungary and has given it another year to get its deficit back in line with commission’s prescribed standards, by extending its accession (full integration) deadline from 2008 to 2009.

Indo-Hungary: Brush Up Needed
If one takes a look at the bilateral trade between India and Hungary the numbers are below expectation. The total trade between the two countries stood at a meagre $116 million in 2005-06. While exports from India aggregated $84 million, Hungary could barely post $32 billion worth of exports back to India. Unfortunately, both countries are still trading in the same items as they did nearly two decades back namely Maruti Vehicles, chemicals and cotton, whereas Hungary still exports machinery, steel & steel products and engineering equipment to India. However, in recent times both the countries have shown willingness to reinvigorate economic relations. Recently, Exim Bank of India & Exim Bank of Hungary signed Reciprocal Lines of Credit of $10 million each to support bilateral trade. The arrangement is aimed at catalysing bilateral trade that requires medium term credit support.

Of late, many Indian companies have made inroads into the Hungarian territory. Tata Consultancy Services has its European Soft ware Development Centre in Budapest, while Satyam has an office in Budapest. Moreover, in July 2006 Sun Pharma acquired Hungarian facility of US drug maker Valeant & Crompton Greaves purchased two Hungarian companies for €35 million this year. Furthermore, Nipuna Services – a subsidiary of Satyam too has announced plans to open a BPO centre in Hungary, which might give the much needed impetus to accelerate two way commerce. It’s time now for India to make further inroads and not to consider Hungary as unconquerable as its Rubik.

(End of Sankalp Bhattacharjee column)

Electronically Yours

The electronics industry of Hungary is one cash cow that iconic corporations world over are swooning to milk. The industry has been the undisputed leader in producing electronic products in Central & Eastern Europe. The electronics industry is the second largest sector in terms of FDI inflows, with a 9% share of cumulative FDI figure of 47 billion euros and the industry accounts for 50% of the total output of the Central and Eastern Europe. Moreover, the industry that has already left big names interested in it, many international executives believe, could prove to be an alternative to China. The likes of Ericsson, Nokia and Siemens in the telecom parts segment; Philips, Alpine, Bosch etc. in automotive parts; Sony Electrolux and Samsung among others in household goods have all relished the congenial investment and production environment provided. It’s time for India Inc. to cash in before the plug is pulled.

Where is Hungary’s ‘pearl’ glow finish?
Hungary outlook

Overview: Hungarian economy
For 2006, the economy is expected to grow at 4%. However weakening domestic demand, due to tight austerity measures, is projected to grow at a slower pace in both 2007 and 2008. Total domestic demand in 2006 is expected to increase by 2.7%, while in 2007 it is expected to turn negative. Unemployment and fiscal deficit are the two main areas, which can hinder Hungary’s growth.

Foreign Trade: Exports & Imports
Imports aggregated €61 billion in 2005, while exports touched €60 billion. In 2005, imports registered an increase of 9%, while exports surged by 12.5%. For H1 2006, exports and imports touched €32.38 billion & €32.36 billion, respectively. The degree of openness, as measured by share of exports in GDP is at 65%. Germany, Austria, Italy, and Russia are Hungary’s main trading partners.

Balance of payments: Deficits
Current account deficit decreased from €7 billion in 2004 to €6 billion in 2005; expressed as % of GDP it was 5.4% in 2005. For H1 2006, current account deficit was at €3 billion. Goods balance declined to a negative of €1.4 in 2005, services & income balance also improved from a negative of €5 billion in 2004 to €4.7 billion in 2005. Capital account balance improved from €260 million in 2004 to €714 million in 2005.

CPI: Cost of Living
Cost of living as measured by Consumer Price Index increased by 3.6% in 2005, compared to 6.8% last year. The economy too felt the heat of increase in crude oil prices, as vehicle fuel increased the most in 2005 by 8.6%. Core inflation, which is calculated by excluding the prices of volatile commodities expanded by a mere 2.1%, compared to 5.8%, a year earlier.