Embassy of India



Embassy of India

Budapest

Economic and Commercial Report for the month of February 2014

Economy

Government approves partnership agreement on EU funds – The cabinet has finalised a partnership agreement on the use of the EU funds for the 2014-20 period, submitted to the European Commission, Economy Ministry state secretary Zoltán Cséfalvay announced. The first tender applications will be invited in the second half of 2014. Hungary plans to allocate Ft 800 billion for innovation and R&D, including Ft 140 billion for startups. Cséfalvay highlighted opportunities for Hungarian companies to participate in the Horizon 2020 programme, which has €77 billion of EU funding. In his view, Hungarian companies could win €300-350 million from the programme.

EC sees GDP growth accelerating – GDP growth in Hungary will reach 2.1% this year, the European Commission predicts in its updated report, forecasting a better figure than the 2% government target. The GDP growth is the result of expanding domestic demand, the Economic Affairs Commissioner Olli Rehn said in Strasbourg. The report sees higher growth in all East European countries, except Slovenia. GDP growth in Hungary was 1.1% in 2013, also better than the 1% forecast by the government. Hungary’s budget deficit will be 2.4-3% of GDP this year and will not exceed 2.9% in 2015, the EC forecast. The report estimates that the deficit was 2.4% in 2013. Fixed capital investment has started to grow, the report adds, due to government investments financed by the EU and the central bank’s funding for lending programme. It notes that sharply falling inflation has enhanced households disposable income but consumption is held in check by the still high unemployment. As the effect of utility rate cuts phases out, inflation will grow from 1.2% in 2014 to 2.8% in 2015 in the EC's view, as the weakening forint poses a risk of accelerating inflation. The EC estimates that the state debt stood at 77.8% of GDP last year and will reach 79.1% this year and 78.9% in 2015. The reports states that falling unemployment is due not only to public works schemes but also to the curbing of the black economy. The EC forecast in general is consistent with the market consensus and government targets, analyst of Dávid Németh K&H Bank commented.

Q4 GDP growth at eight-year high – Hungary’s GDP was up 2.7% year-on-year in the fourth quarter of 2013, exceeding analysts’ estimates, according to preliminary data from the Central Statistics Office. In the year as a whole, GDP grew by 1.1%. GDP expanded by 0.6% from the third quarter. The quarterly growth figure was the highest since 2006. The automotive sector, agriculture and state orders ahead of the elections all contributed to the high growth, said analyst Zsolt Kondrát of MKB. Government expenditures increased ahead of the elections, but household consumption did not, despite extra income, argued Citibank analyst Eszter Gárgyán. “The economy is doing better” and hopefully it will also do so in the future, Economy Minister Mihály Varga commented. Such high growth has not occurred for eight years, he added. The 1.1% 2013 growth exceeded the government target of 0.7% set in the euro convergence plan filed with the EU in April last year, and even outperformed the later modified target of 0.9%, Varga underlined. He said the government will not change its 2014 targets of 2% GDP growth and 2.4% inflation in the next four to five months. Economic growth will remain sustainable and balanced, relying on export demand, Varga continued, adding that domestic demand may rise because utility price cuts, higher wages, and the expansion of family tax allowances will leave more money with families.

GKI sees temporary improvement – The improvement in the Hungarian economy is only temporary, economics institute GKI writes in its latest report. GKI maintains its 1% GDP growth forecast for this year but has lowered its 2014 inflation target from the 2.1% forecast in December to 1.5%. Household consumption will grow only with a time lag after purchasing power has risen, but if the weaker forint becomes permanent then even 1.5% consumption growth can not be reached, GKI argued.

Inflation falls to zero – Year-on-year inflation in January was 0%, for the first time since 1970, the Central Statistics Office announced. The monthly increase in prices from December to January was 0.3%. Vegetable prices went up 8% month-on-month. The utility bill cuts and falling fuel prices made the zero inflation possible, observed analyst Ákos Kuti of Equilor brokers. The economy is not facing a deflationary environment, as core inflation was 3.4%, year-on-year, he underlined.

Budget spending higher in January – The budget deficit was Ft 75.4 billion in January, far beyond the Ft 2.5 billion in the same month of last year, due to the increase in teachers salaries and the takeover of health care institutions, the Economy Ministry announced on 20th Feb. Spending in January was Ft 72.5 billion higher this year than last. Final figures show that the central budget incurred a Ft 166.6 billion deficit, while state funds and social security funds posted surpluses of Ft 54.6 billion and Ft 36.6 billion, respectively. Subsidies for local governments have exceeded levels paid out last year. There is no need to amend the budget because of the weaker forint, state secretary Benő Péter Banai remarked after the release of the data. The budget’s reserves of Ft 220 billion are sufficient, he said, adding ”We hope that the exchange rate will come down and that investors will realise sooner or later that Hungary's fundamentals are sound”. Banai argued that the negative effects of the weaker forint, such as higher debt service costs, are partly offset by higher revenues due to the inflationary effect. The government will update its convergence programme forecasts in April.

|Budget revenues in January (Ft bn) |

|2013 |2014 |

|Corporate tax |14.1 |31.8 |

|Income tax |160.4 |156.0 |

|VAT |225.6 |210.8 |

|Excise tax |64.8 |62.2 |

No slowdown in MNB rate cut drive – The MNB’s monetary council surprised observers with a larger base rate cut than expected on 18th Feb, lowering the figure from 2.85% to 2.7%, causing the forint to weaken from 308.3 per euro to 310. The monetary council argued that the Hungarian economy is fundamentally different from those of other emerging market countries, which are considered vulnerable. Despite increased uncertainty on global money markets, there is still room for further rate cuts, but the next trend will be set in March, after the MNB’s new inflation report is released, the council said. The MNB considers the recent hit on emerging markets a one-off event, when investors realised that Hungary is not Turkey, analyst Peter Attard Montalto of Nomura commented. Disagreeing with the MNB’s assessment, he said the rate cut makes Hungary more exposed to the markets, as tension concerning emerging markets will not go away. In a similar vein, portfolio manager Dániel Bebesy of fund manager Budapest Alapkezelő said the MNB is taking a great risk, as the continuous rate cuts no longer affect the growth outlook substantially, but the weakening of the forint in January has shown that the low Hungarian rates leave the forint vulnerable in a tense international environment. Gergely Suppan of state-owned Takarék-bank said that although future inflation allows for a rate cut, the volatility of the forint signals that low interest rates do not support the forint exchange rate.

Registered companies getting fewer – The number of registered companies saw a 13.9% decline last year to 35,000, well below a peak of 50,000 in 2008, according to consulting firm Bisnode Magyarország New company registrations picked up in 2011 but fell in the past two years. New rules raising the minimum capital requirement for a limited company to Ft 3 million after March 15 will not help in the creation of more businesses. Existing companies have two years to meet this new requirement.

Cash register fiasco costs state Ft 3bn – The state is expected to assume Ft 3 billion in claims from retailers who ordered new online cash registers as mandated by the government, but were left empty-handed when the licenses of two previously approved distributors were revoked, the Economy Ministry told state news agency MTI. Retailers will receive compensation, which will equal the money paid as advance payments for the two types of cash register. The government is planning to take legal action against the distributors to recover money paid by merchants.

Legal cigarette sales fell last year – The number of legally sold cigarettes was 9.3 billion in 2013, down from 12.5 billion in 2012, the tax authority NAV announced. Sales in December last year amounted to only 685 million cigarettes. The number of legal cigarette sale points has dropped with the state monopoly on tobacco retail. In addition, the price of tobacco products went up 20% from 2012.

Varga unveils Paks financing costs – Hungary’s €10 billion loan from Russia to finance the expansion of the Paks nuclear plant will have a variable interest rate of 3.9-4.9%, Economy Minister Mihály Varga said. The 21-year loan agreed on 5th February will cover 80% of the estimated cost, and Hungary will fund the remaining 20% from its own sources. Repayment will start in 2025, after a 10-year period to plan and build two new blocks at Paks, Varga said. The interest rate will rise in stages from 3.9% to 4.5% and 4.9% over the years. The loan is to be repaid by 2046. Varga described the terms of the loan as “extremely favourable”, adding that they are better than could have been obtained on the market. The contract includes an option for early repayment, he added. At annual interest of 4%, Hungary will pay back Ft 6 trillion (€20 billion) which is Ft 300 billion annually at current prices. When the financial agreement is signed, it will be submitted to Parliament for approval.

Commercial

EU approves MOL-JSR joint venture – The European Commission has given the green light for the formation of a joint venture between MOL and Japan Synthetic Rubber (JSR). The two agreed to form a joint venture in 2013 to produce synthetic rubber tyres in Tiszaújváros. The joint venture, 51%-owned by JSR and 49% by MOL, is set to start production from 2017 with annual capacity of 60,000 tonnes.

One-off items hurt MOL profits – MOL announced a decline in net profit in 2013 to Ft 21.6 billion, from Ft 151.5 billion in 2012, citing one-off items such as write-downs in Syria and Croatia. Results were also hit by lower hydrocarbon prices and a 10% fall in production, excluding Syrian operations, as a result of natural decline in output and the sale of a Russian field. Fourth-quarter net profit sank to Ft 4.9 billion, from Ft 9.5 billion one year earlier, due in part to write-downs and the cost of converting the MOL refinery in Mantova. Chairman and CEO Zsolt Hernádi said in a statement that the decline in output will be reversed this year by the speeded-up development of key projects and by possible acquisitions “to achieve a step change” in upstream operations.

|MOL Group IFRS results (Ft bn) |

|Q4 ’13 |2013 |2012 |

|Net sales |1,358.9 |5,401.1 |5,521.3 |

|Ebitda |109.7 |520.4 |524.7 |

|Operating profit* |(41.8) |(18.7) |205.3 |

|Net profit |4.9 |21.6 |151.5 |

|Net profit* |84.9 |176.6 |183.4 |

|*Excluding special items |

Real wages up 3.1% in 2013 – Real wages rose by 3.1% in 2013, as net wages went up 4.9% and the average inflation was 1.7%, the Central Statistics Office announced. The average gross wage was Ft 230,700 per month, a 3.4% rise, while the average net wage went up 4.9%, to Ft 151,100. The net averages were Ft 104,400 for blue-collar workers and Ft 201,300 for while-collar staff. Gross wages were down 1.1% in December, due to the expansion in the number of public works employees, but the net wage was up 0.4% year-on-year, the same as the December inflation. Excluding public works, gross wages were up 1.6% and net wages expanded 3.1%.

Coca-Cola now a strategic partner – State secretary for external economic relations Péter Szijjártó signed a strategic cooperation agreement with Coca-Cola HBC Magyarország at its bottling factory in Zalaszentgrót, Zala county on 3rd Feb. These agreements with large international corporations substantially enhance Hungarian exports, thereby improving the performance of the national economy, Szijjártó said. Last year’s expansion of the bottling facility means that Hungary’s mineral water exports can be doubled, he noted. The Hungarian unit’s export revenues reached Ft 20 billion last year, from Ft 8 billion in 2011. Coca-Cola has invested Ft 110 billion in Hungary to date, and employs 1,250 per-sonnel.

Heineken signs co-operation pact – Trade and investment promotion agency HITA signed a cooperation agreement with the Hungarian unit of Heineken brewery on 20th Feb. HITA will support the brewery’s investments and long-term strategic goals by coordinating government initiatives. Heineken produces the Soproni, Gösser, Zlaty Bazant, and Kaiser brand beers, among others, at its breweries in Sopron and Martfű, near Szolnok.

Gov’t exempts Takarékbank sale from competition law – The cabinet has declared the merger of Takerékbank and Magyar Takarék of strategic importance, it was announced in the official gazette. As a result, the competition office GVH will have no power to rule on the merger. Magyar Takarék is believed to be the buyer of Takarékbank, after only one bid come in for MFB's 35.3% stake and Magyar Posta's 19.3% holding in the bank of Hungary’s savings cooperatives. Despite numerous requests for information, authorities have neither denied nor confirm that Magyar Takarék has won the right to buy the majority stakes in Takarékbank. Takarékbank and its 122 savings cooperatives have total assets of Ft 2.1 trillion, twice as much as mortgage bank FHB, Magyar Takarék’s largest shareholder, with a 25% stake. The other shares are held by 12 or more coops and persons associated with them. The acquisition of Takarékbank by Magyar Takarék, which could be finalised by March 20, would make FHB Hungary’s second largest bank by assets after OTP. Considering that FHB has earlier signed strategic agreements with Magyar Posta, with the two buying utility bill company Díjbeszedő, and FHB having obtained a 50% stake in investment vehicle Magyar Posta Befektetési, the merger may not have received regulatory approval if the GVH was allowed to proceed.

Bank of China, Huawei to expand here – The Bank of China will base its regional centre in Hungary and build a network of branches to serve Chinese companies active in Central Europe, under an agreement signed by Prime Minister Viktor Orbán in Beijing on 12th Feb 2014. In all, 19 agreements were signed by the government, as well as Hungarian and Chinese companies, on such matters as cooperation in water management, the distribution of Hungarian wines, and on establishing centres for environmental research and development and innovation. The latter is planned with Huawei Technologies Hungary, who signed a statement of intent with János Berényi, head of the foreign trade office HITA. Huawei plans to double the number of its employees in Hungary by 2015, to as much as 3,000 in Pécs and Komárom. Wanhua, owner of petrochemical company BorsodChem, signed a strategic cooperation agreement.

Majority of service centres plan further investments – Two-thirds of the office service centres operating in Hungary plan further investments, mostly to expand financial and customer services, according to a report by business consultants Ernst & Young. In a survey, 90% of respondents said they had achieved their business goals in Hungary, with 50% describing their results as beyond expectations. The majority said they value Hungary's highly qualified workforce, language competence and low costs. Hungary is now home to almost 80 service centres, which employ more than 30,000 people, said external economic relations state secretary Péter Szijjártó. State investment and trade agency HITA is managing 30 projects related to the opening or expansion of service centres, which could create an additional 9,000 jobs, he added.

Deutsche Telekom to invest €1bn to expand broadband access – The government and Magyar Telekom have agreed to make broadband internet available to all households by 2018, under a contract signed 21st February by Prime Minister Viktor Orbán and Timotheus Höttges, CEO of Magyar Telekom’s owner Deutsche Telekom. Deutsche Telekom will invest several hundred billion forints in Hungary to achieve the target, Höttges told reporters. Magyar Telekom is intending to invest €1 billion over the coming four years and the government will provide Ft 80 billion subsidy to it. The government will revise its regulations and tax policy concerning the telecoms sector In order to achieve complete broadband access, but the agreement does not include a revocation of the extra tax on the sector, said Magyar Telekom CEO Christopher Mattheisen. The investment required is more than the Ft 1.8 trillion that Deutsche Telekom has ploughed into Hungary since 1993, Höttges underlined. Kerstin Günther, chairwoman of the Magyar Telekom board of directors, noted that the agreement will make possible the utilisation of the maximum in EU subsidies available. Orbán pointed out that Deutsche Telekom has invested Ft 1.8 trillion in Hungary and pays some Ft 140 billion in taxes annually. “There is no way back, we will be the best, we have crossed the Rubicon and the chances are really high that the Hungarian economy will be based on the most modern infrastructure of Europe,” Orbán emphasised. Günther dismissed rumours that Deutsche Telekom is planning to buy out minority shareholders of Magyar Telekom. After that statement the share price fell 3.8% on 21st Feb.

Automotive sector going from strength to strength – Hungary has become a major car production centre with 712 companies operating in the sector, employing 115,777 people, economic relations state secretary Péter Szijjártó said. Speaking at a press conference along with leaders of the Hungarian units of multinational car manufacturers, he said the automotive industry's output reached €17.8 billion last year, accounting for 20% of all manufacturing output. The outlook for car makers looks promising as orders rose 80% in the 12 months to September 2013, said director János Berényi of the trade and investment agency HITA. Audi Hungaria chief financial officer Axel Schiffer pointed out that Audi manufactured 1.9 million engines and 42,851 cars rolled off its Hungarian production lines last year. Audi has invested an average of €250 million annually in Hungary over the past 20 years, he noted. The company is now in talks on setting up a new logistics centre, after opening a 72,000m2 warehouse last year. Mercedes has assembled 150,000 cars since the start of production at its plant in Kecskemét, the subsidiary’s CEO Frank Klein told reporters. Its CLA model, made exclusively in Hungary, is exported to 180 countries. Suzuki Magyarország plans to boost its Hungarian production to 200,000 vehicles this year from 160,000 in 2013, and will launch the new family sedan IV4 by the end of 2015, said vice president László Urbán. Opel has invested €1.4 billion at its Szentgotthárd plant since 1990 and will begin producing its fourth line of engines this year, managing director Tamás Solt observed. The factory has turned out 7.5 million engines since it opened. Suzuki is set to manufacture 430,000 vehicles in Hungary this year, Audi 125,000 and Mercedes 105,000.

Rába gets €18mn worth of orders – Rába Futómű has obtained two large orders on the European market, the state-owned axle and auto parts maker announced. Rába will deliver axles to two truck makers for an annual €18 million from 2016, the company added, without naming its clients. The income is substantial, as Rába Futómű took in Ft 24.4 billion in the first three quarters of 2013. The axle division generates nearly 70% of revenues for the Rába group. The share price gained 5% after the announcement.

Fourth-quarter net profit was up 84% year-on-year to Ft 720 million at axle and truck maker Rába, the state-owned company announced. Results were boosted by a 14% rise in revenue to Ft 12.7 billion. The strong profit is a result of declining financial losses, from Ft 238 million one year earlier to Ft 15 million. Operating profit rose 13% to Ft 875 million. For the full year, net profit rose to Ft 2.7 billion from Ft 569 million on Ft 46.5 billion of revenue, a 12.1% rise. Rába’s net loans shrank from Ft 14.4 billion to Ft 8.9 billion.

Continental expands in Veszprém – Continental Automotive has completed a more than Ft 2.8 billion development project, creating 152 jobs in Veszprém. An additional 12 production lines were installed, the office space was enlarged and a new storage facility was built. In addition, the centre of the company’s brake system research and development operations has been moved to Veszprém. Continental employs more than 6,000 personnel at its six factories in Hungary.

Bilateral

Bilateral Trade (USD Million)

| |2011 |2012 |2012 Jan-Nov |2013 Jan-Nov |% change |

|Import from India |353.0 |363.9 |342.0 |346.3 |1.3% |

|Export to India |487.8 |278.7 |258.3 |194.1 |-24.9% |

|Total |840.7 |642.6 |600.3 |540.5 |-10.% |

Key Statistics of Hungary

| |2009 |2010 |2011 |2012 |2013 |

|Population |10.01 |9.98 |9.96 |9.96 |9.96 |

|GDP, US$ bn |129.10 |130.30 |138.9 |126.8 |130,6* |

|Real GDP Growth, % |-6.30 |1.20 |1.70 |-1.7 |0.16%* |

|Consumer Price Inflation |4.20 |4.90 |5.50 |5.7 |1.7% |

|Exports, goods, fob |83.10 |94.70 |111.1 |94.3 |Jan-Nov |

|US$ bn | | | | |100.7 |

|Imports, goods, fob |77.50 |87.30 |102.0 |103.3 |Jan-Nov |

|US$ bn | | | | |91.5 |

|Current a/c bal, US$ bn |0.40 |2.70 |Q4 2011 |Q4 2012 0.17 |Q4 2013 |

| | | |1.07 | |1.41 |

|Forex reserves, incl gold, US$bn |44.10 |46.7 |2012 Jan 44.6 |2013 Jan |2013 Dec |

| | | | |46.7 |46.5 |

|Total external debt, US$bn |222.63 |205.10 |206.0 |(Q4 2012) 198.6 |Q3 2013-192.2 |

|Exch rate (av), HUF:US$ |202.26 |208.15 |200.9 |225.37 |223.70 |

|GDP per capita, USD |12 874 |13 029 |13916 |12735 |13,344* |

|Budget Deficit, % of GDP |4.0 |4.3 |Surplus Q4 |1.8 |2.5 |

* estimates by IMF

Average Monthly Exchange rates for January

1US$= 227.0425HUF

1EUR= 310.102HUF

Source: MNB-Hungarian National Bank mnb.hu

Global trade of Hungary (USD Million)

| |2011 |2012 |2012 Jan-Nov |2013 Jan-Nov |% change |

|Global imports |101 375.4 |94 307.7 |87 448.9 |91 486.7 |4.6% |

|Global exports |111 217.7 |102 83.4 |95 779.4 |100 746.2 |5.2% |

|Total |212 593.1 |197 138 |183 228 |192 232 |4.9% |

Upcoming Trade Fairs in Hungary:

|(i) CONSTRUMA International Building Trade Exhibition 2014. April 02-06. |

|(ii) INDUSTRY DAYS International Industrial Trade Exhibition 2014. May 27-30. |

Further information: hungexpo.hu

Trade enquiries: In the month of February 2014 Embassy of India, Budapest received 13 trade enquiries from India and 1 trade enquiry from Hungary.

(Mr. DCD Dass)

Second Secretary (Comm, HOC)

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