PEOPLE

Population: 10,045,407
Age structure:
0-14 years: 16.1% (male 832,033; female 787,336)
15-64 years: 69% (male 3,406,046; female 3,523,118)
65 years and over: 14.9% (male 544,099; female 952,775)
Population growth rate: -0.29% (2003 est.)
Birth rate: 9.32 births/1,000 population
Death rate: 13 deaths/1,000 population
Ethnic groups: Hungarian 89.9%, Roma 4%, German 2.6%, Serb 2%, Slovak 0.8%, Romanian 0.7%
Religions: Roman Catholic 67.5%, Calvinist 20%, Lutheran 5%, atheist and other 7.5%
Languages: Hungarian 98.2%, other 1.8%
 

Political structure

POLITICAL PARTIES AND LEADERS

Alliance of Free Democrats or SzDSz [Gabor KUNCZE] - liberal;
Hungarian Civic Alliance or Fidesz [Viktor ORBAN, chairman] - conservative;
Hungarian Democratic Forum or MDF [Ibolya DAVID] - center-right;
Hungarian Socialist Party or MSzP [Laszlo KOVACS, chairman] - center-left

Hungary's centre-left government continues to pursue the structural reforms required by EU membership, set for May 2004. It is also committed to the promotion of growth. However, it is constrained by a large fiscal deficit, which must be reined in if Hungary is to join the EU's economic and monetary union (EMU) before the end of the decade.

POLICY ISSUES

Executive branch:
Chief of state: Ferenc MADL (since 4 August 2000)
Head of government: Prime Minister Peter MEDGYESSY (since 27 May 2002)
Cabinet: Council of Ministers elected by the National Assembly on the recommendation of the President
Elections: President elected by the National Assembly for a five-year term; election last held 6 June 2000 (next to be held by June 2005); Prime Minister elected by the National Assembly on the recommendation of the President
Legislative branch: unicameral National Assembly or Orszaggyules
Election results: percent of vote by party (5% or more of the vote required for parliamentary representation in the first round) - Fidesz/MDF 48.70%, MSzP 46.11%, SzDSz 4.92%, other 0.27%; seats by party - Fidesz 164, MSzP 178, MDF 24, SzDSz 20
Elections: last held 7 and 21 April 2002 (next to be held by April 2006)
 

Economy

    The Hungarian economy has achieved strong growth, averaging 4.25 per cent annually since 1997. This good performance has relied on a dynamic export sector largely made up of foreign-invested firms, and a rapid integration into European production networks. Since 2001, very strong domestic demand has been underpinned by a surge in minimum wages and public sector pay as well as strong public-sector investment. However world-trade growth has slowed and gains in export-market share have diminished substantially so that, overall, GDP growth has weakened. The continued rapid real convergence of the Hungarian economy with that of the European Union will first and foremost require maintaining, and indeed strengthening, the competitiveness of the Hungarian economy in a broad sense of being an attractive location for developing business activities.
 

MACROECONOMIC TRENDS

    Attracting foreign investment is a priority for the Hungarian government. A substantial body of law and a number of treaties protect foreign investment in Hungary, provide for national treatment and ensure profit repatriation. Hungary's accession to the European Union, an aspiration shared by all major political parties, further affirms the country's commitment to an open investment regime.

    Continued strong growth cannot rely on high productivity growth alone but will also require a more intensive utilisation of labour resources. The Hungarian economy is characterised by a very low overall employment rate and a sharp regional divide between the booming central western part of the country, where growth has been concentrated and labour shortages are emerging, and the poorer, less dynamic north, south and east. Increasing labour force participation, enhancing labour mobility and broadening the economic boom to currently less prospering regions thus constitutes another challenge for Hungary.
 

Ownership structures / Privatization

STATE OWNERSHIP

    The Hungarian Privatization and State Holding Company (APV) manages and sells state-owned properties, with Ministry of Finance approval for the banking sector. State assets administered by APV fall into three categories: - Small minority holdings that will eventually be sold. - "Golden shares" in certain strategic companies that give the Hungarian government an advisory role and veto power on major management decisions. These rights, most likely, will be eliminated shortly after EU membership. - Majority ownership. Fewer than 200 companies remain in long-term state ownership.

    Following the major slowdown in privatization during the Orbˇn government in 1998-2002, the current Prime Minister, Mr. Péter Medgyessy, has pledged to restore transparency and encouraged investment into and the privatization of state-owned enterprises. The Medgyessy government is pursuing a policy of shedding state ownership and has defined the next group of companies to be further privatized, including several financial institutions, MOL (The Hungarian Oil and Gas Company), Antenna Hungária, Bábolna. The privatization of PostaBank and Dunaferr has been completed by the end of 2003.
 

FOREIGN OWNERSHIP

    Up to 100 percent foreign ownership is permitted with the exception of designated "strategic" holdings, some defense-related industries, and the national airline, Malév. Foreigners investing in financial institutions and insurance must officially notify the government, but do not need advance authorization. Foreign financial institutions may operate branches and conduct cross-border financial services in Hungary, in keeping with OECD commitments. Currently, foreign firms control 2/3 of manufacturing, 90% of telecommunications, and 60% of the energy sector.

    Under the Investment Act, a company incorporated in Hungary may only acquire real estate "required for its economic activities," but this has been broadly interpreted and has not prevented foreign entrepreneurs from engaging in property development. The 1994 Land Law restricts the purchase of land by foreigners to 6,000 square meters, but allows for leases of up to 300 hectares for a maximum of 10 years. Only private Hungarian citizens can purchase farmland, while others may lease it. Restriction on foreigners buying land would remain in force for 7 years following EU membership and it is possible they would be extended for an additional three years.
 
 

Regulatory issues

CONVERSION AND TRANSFER POLICIES

    The Hungarian forint (HUF) has been convertible for essentially all business transactions since January 1, 1996. Hungary complies with IMF Article VIII and all OECD convertibility requirements. In 2001, Hungary eliminated all remaining capital controls and adopted an exchange rate intervention band of +/-15 percent around a benchmark rate against the euro.

    Short-term portfolio transactions, hedging, short and long-term credit transactions, financial securities, assignments and acknowledgment of debt may be carried out without any limitation or declaration. While the forint remains the legal tender in Hungary, parties may settle financial obligations in foreign currency. Companies operating in customs-free-zones may keep their foreign currency abroad with no restrictions. However, EU membership-expected in May 2004-will eliminate these zones.
 

DISPUTE SETTLEMENT

    Hungary has an independent judiciary and fairly well developed commercial-law system. The legal process can be quite lengthy, however. EU accession will empower private parties to appeal violations of EU rights or regulations directly to EU bodies, providing another means of redress in potential disputes.

    Hungary has accepted binding international arbitration in cases where the resolution of disputes between foreign investors and the state is unsuccessful. Hungary is a member of the International Center for the Settlement of Investment Disputes (ICSID) before which it had no pending cases as of June 30, 2003. Hungary is also a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
 

PERFORMANCE REQUIEREMENTS / INCENTIVES

    Investment incentives are available to all enterprises registered in Hungary, regardless of the nationality of owners or location of incorporation. To comply with European Union rules, the government of Hungary no longer grants tax holidays based on investment volume. Companies previously granted this incentive can still receive cumulative tax benefits up to 75% of the total investment volume for investments started before January 1, 2000 and 50% for subsequent investment until 2005.

    Hungary grants tax allowances for small and medium-sized enterprises (SMEs), that is, businesses with less than 250 employees and annual net sales revenue of less than HUF 4 billion. Forty percent of the interest on loans for the purchase or manufacture of capital goods is tax deductible, up to HUF 5 million per year.

    For investments in underdeveloped priority regions where unemployment exceeds 15 percent or in certain enterprise zones, the government also offers regional tax allowances equal to the full corporate tax calculated on the basis of net revenues. In enterprise zones, companies may receive this allowance for up to five tax years, as long as net annual sales increases exceed one percent per year. In priority regions, net sales must increase by five percent of the investment value for each year, up to five years.

    The current Hungarian government has scaled back investment incentives offered under the previous government's "Széchenyi Plan," which had granted up to 25 percent of certain investment costs. The new government has offered the "Smart Hungary" plan instead. This plan includes a variety of tax breaks, subsidies and simplified investment regulations. Many elements of the plan are not yet in effect. The National Development Program, defines priority areas of development where EU support could be acquired.

    There have been no complaints against Hungary related to any failure to fulfill any trade related investment measures (TRIMS) treaty obligation.
 

RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT

    The Hungarian constitution guarantees the right to private ownership and provides other related guarantees. Foreign and domestic private entities may establish and own business enterprises and engage in all forms of remunerative activity, except those prohibited by law. Hungarian law guarantees the right of private entities to freely establish, acquire, and dispose of interests in business enterprises. Many foreign companies operate through representative offices.

    Amended Act 1988/24 on Investments of Foreigners in Hungary (the "Investment Act") governs the establishment and operations of companies with foreign participation, and grants significant rights and benefits to foreign investors. It guarantees national treatment for foreign investments and eliminates the requirement for prior government approval. It also provides protection against losses resulting from nationalization, expropriation, or similar measures, and guarantees free repatriation of invested capital and dividends.

    The Companies Act of June 1998 compels registry courts to process applications to register limited liability (Kft.) and joint-stock (Rt.) companies within 30 days (60 days for unincorporated business entities). If the court fails to act in the period, the new company is automatically registered. The act eliminated separate registrations at the tax and social security authorities. The minimum capital required for a limited-liability company is HUF 3 million and for a joint-stock company HUF 20 million.

    All firms registered in Hungary are under the Court of Registration's legal authority. The Court maintains a fully computerized registry, provides public access to company information and is developing a system of fully electronic filing. The Court also enforces compliance with the Companies Act. The Act prescribes a two-tier management structure for public companies, with both a management board and a supervisory board, which acts as an agent of all shareholders. Supervisory boards are typically quite weak.
 

Economic environment

TAXATION

    The corporate tax rate on reinvested profit is set to fall to 16% in 2004 after nine years of being levied at 18%. Automatic tax incentives for foreign-owned and joint-venture companies have been eliminated. A two-tier value-added tax (VAT) system has been in place since January 1st 1993. The current basic VAT rate is 25%, with a preferential rate of 12% for food, energy and some other items (this rate is set to rise to 15%). The rate for the employers' social security contribution was reduced from 33% to 31% in 2001, and to 29% in January 2002.
 

FOREIGN TRADE

    After the fall of communism, there was a reorientation of trade to the West, with around three-quarters of Hungary's exports now directed to the EU. Hungary ran large current-account deficits in the mid-1990s, but external balances improved along with export competitiveness. In 1998-2001 the current-account deficit showed steady improvement, but this changed in 2002-03, as wage increases outpaced productivity growth, and demand in the EU stagnated.
 

PRICE REGULATION AND DELIBERALIZATION

    Foreign companies operating in price-regulated sectors, such as energy and pharmaceuticals, have suffered decreased margins due to government delays in adjusting prices upward and extending subsidies to new drugs. Multinational pharmaceutical firms believe they have spent considerable time negotiating with the Ministry of Health with little effect on the price and reimbursement policies of the national health system. The current government plan for private subsidized medications is to provide a flat subsidy for each group of illnesses, which pharmaceutical companies see as impractical.

    Substantial market deregulation has occurred over the past few years. The electrical market is being unbundled and largely privatized. In June 2003, the Hungarian government passed the Gas Act, which provides the framework for gradual liberalization of the natural gas market from January 2004. On the other hand, that same act has reduced the political autonomy of the Hungarian energy regulatory office (HEO or MEH in Hungarian). The latest issue of price regulation concerns the medicine prices that have grown by more than 10% in 2004 and the government decided to set the prices and not allow the market for price adjustments.
 

Macroeconomic indicators

Privatization since 1990

	Number of transactions	HUF (billion)	Share %
Germany	125	292,56	23,44
USA	51	166,57	13,34
France	54	103,25	8,27
Austria	151	63,99	5,13
Belgium	15	53,45	4,28
The Netherlands	23	43,84	3,51
Italy	28	34,88	2,79
United Kingdom	39	20,04	1,61
Switzerland	20	18,39	1,47
CIS	17	10,23	0,82
Sweden	15	5,74	0,46
Finland	3	6,30	0,50
Greece	4	1,92	0,15
Luxemburg	7	1,6	0,13
Others	32	8,82	0,71
Int. Placement of Shares	39	416,78	33,39
TOTAL	623	1248,36	100,00