Hungary 18K Annual report (foreign governments) | SEC 13 Nov 08

EXHIBIT 99.D
DESCRIPTION OF THE REPUBLIC OF HUNGARY
DATED NOVEMBER 11, 2008

TABLE OF CONTENTS


FOREIGN EXCHANGE			1
PRESENTATION OF INFORMATION			2
THE REPUBLIC OF HUNGARY			3
General			3
Political System			4
International Relations			8
THE ECONOMY			10
Background			10
Recent Economic Performance			10
Principal Sectors of the Economy			16
PRIVATIZATION			20
Status of Privatization Efforts			20
Methods of Privatization Used			21
BALANCE OF PAYMENTS AND FOREIGN TRADE			22
Balance of Payments			22
Foreign Trade			23
Foreign Direct Investment			25
Foreign Exchange Reserves			32
MONETARY AND FINANCIAL SYSTEM			34
National Bank of Hungary			34
Foreign Exchange and Convertibility of the Forint			37
The Hungarian Banking System			37
Capital Markets			39
PUBLIC FINANCE			42
General Information			42
Methodology			42
Budget Trends			42
Central Government Budget			44
Corporate Profit Tax and Corporate Dividend Tax			48
Personal Income Tax			48
Value Added Tax			48
Registration Tax			48
Excise Duty			48
Luxury Tax			48


Solidarity Surtax			48
Other Central Government Revenues			48
Local Taxes			48
Social Security and Extra-Budgetary Funds			48
Health Care System			49
Pension System			50
Local Government Finance			50
EU Net Position			51
Medium-Term Fiscal Program and the Convergence Programme			52
NATIONAL DEBT			54
General Information			54
Public Debt			54
Gross External Debt			57
Relations with Multilateral Financial Institutions			60
TABLES AND SUPPLEMENTARY INFORMATION			62
External Funded Convertible Currency Debt of the NBH and the Republic			62
Internal Debt of the Republic			70
TABLES AND SUPPLEMENTARY INFORMATION			72
Guarantees Provided by the Republic			72

This document is an exhibit to the Republic of Hungary’s Annual Report on Form 18-K for the fiscal year ended December 31, 2007.

FOREIGN EXCHANGE

Except as otherwise specified, all amounts in this report are expressed in Hungarian forints (“forint” or “HUF”), in euro (“Euro” or “EUR”), and in U.S. dollars (“$” or “USD”). All currency conversions in this report are at the Hungarian National Bank’s (the “NBH”) official middle rate of exchange on a particular date or calculated at the average of the middle rates of exchange for a particular period. For your convenience, we have converted certain amounts from forint into USD and/or Euro at the average exchange rate for each relevant period or the exchange rate in effect on a given date.

The following table sets forth the forint/Euro exchange rates for the last day of the periods indicated and the average exchange rates during the periods indicated:


	2003		2004		2005		2006		2007
	(HUF per EUR)
Year end		262.23		245.93		252.73		252.30		253.35
Average for year		253.51		251.68		248.05		264.27		251.31


Source: NBH

The following table sets forth the forint/USD exchange rates for the last day of the periods indicated and the average exchange rates during the periods indicated:


	2003		2004		2005		2006		2007
	(HUF per USD)
Year end		207.92		180.29		213.58		191.62		172.61
Average for year		224.44		202.63		199.66		210.51		183.83


Source: NBH

On November 11, 2008, the official (middle) exchange rate was HUF 210.15 = USD 1.00, HUF 268.47 = EUR 1.00, and EUR 1.28 = USD 1.00. For information on the convertibility of the forint, see “Monetary and Financial System – Foreign Exchange and Convertibility of the Forint.”

Totals in certain tables in this report may differ from the sum of the individual items in such tables due to rounding. In addition, certain figures contained in this report are estimates prepared in accordance with procedures customarily used in Hungary for the reporting of data. Certain other figures are preliminary in nature. In each case, the actual figures may vary from the estimated or preliminary figures set forth in this report.

PRESENTATION OF INFORMATION

Unless otherwise indicated, all data in this report are presented for comparison purposes in accordance with the methodology of the International Monetary Fund (as set forth in the Manual on Governance Finance Statistics, IMF 1986) (“GFS”). In order to comply with its European Union (“EU”) accession obligations, the Republic has commenced producing certain data on the basis of the European System of Accounts 95 (“ESA 95”). ESA 95 methodology monitors revenues and expenditures on an accrual basis, whereas GFS methodology monitors revenues and expenditures on a cash basis. Under ESA 95, certain issued state guarantees are reclassified as government debt and increase the deficit. The definition of the general government sector is extended to include certain quasi-governmental institutions.

On March 22, 2005, the EU decided the ESA 95 deficit figures should be adjusted in certain countries (including Hungary) due to the introduction of private pension systems. In particular, the EU decided that a given ratio of revenue shortfall should be deducted from the ESA 95 budget deficit figures when measuring the Maastricht criterion related to budget deficit per gross domestic product (“GDP”) ratio. For the Republic, the EU decided that, for 2004 and 2005, 100% of the revenue shortfall should be deducted from the government budget, for 2006, 80% of the revenue shortfall should be deducted, for 2007, 60% of the revenue shortfall should be deducted, in 2008, 40% of the revenue shortfall should be deducted, and in 2009, 20% of the revenue shortfall should be deducted. Eurostat and the Republic publish budget deficit data based on ESA 95 both as adjusted for deductions for the revenue shortfall due to the introduction of private pension systems, and without such adjustment. Accordingly, in this report, (i) budget deficit data referred to as being based on “Adjusted ESA 95” refers to budget deficit data based on ESA 95 which has been adjusted for deductions for the revenue shortfall due to the introduction of private pension systems and (ii) budget deficit data referred to as being based on “Unadjusted ESA 95” refers to budget deficit data based on ESA 95 which has not been adjusted for deductions for the revenue shortfall due to the introduction of private pension systems.

On October 3, 2005, the Hungarian Central Statistical Office (“CSO”) modified the calculation methodology of the gross domestic product as measured by ESA 95. From 2005, according to the applicable EU regulations, Financial Intermediation Services Indirectly Measured (“FISIM”) is required to be calculated on a new methodology and is required to be allocated to user sectors/industries. As a result of this methodological change, the CSO revised upwards the GDP data for the years 2001, 2002, 2003 and 2004. All GDP data in this report have been calculated based on the revised methodology.

On September 30, 2008, the National Bank of Hungary (“NBH”) modified the calculation methodology of the balance of payments. According to the NBH, the revision of goods data is the most significant of the areas affected by the revision. In the past, trade accredit assets in the balance of payments were determined basically by the difference between cash-based trade data reported to the NBH and accruals-based statistical data as measured by the CSO. Beginning in the third quarter of 2004, such deviations showed an unidirectional pattern, unjustifiable in terms of economic fundamentals. The NBH recorded a large part of calculated turnover in trade credit as statistical error (under errors and omissions) and started to examine the causes of deviations together with the CSO. During the examination, enterprises not registered in the territory of Hungary, only obliged to declare VAT but playing an increasingly greater role in the country’s foreign trade, became the centre of attention. Such enterprises provide data for Hungary’s foreign trade statistics, in accordance with the practice of the European Union. While the data must be treated as part of Hungarian foreign trade, consistent with international standards on foreign trade statistics, there are no clearly defined recommendations for their treatment in the national accounts and the balance of payments. In the view of domestic experts, in terms of the national accounts and the balance of payments such enterprises do not constitute part of the Hungarian economy and, therefore, they should be recorded differently from the standards on foreign trade statistics. This means that trade margins on foreign trade transactions should be ignored when assessing the performance of the Hungarian economy. The NBH have revised the values of goods exports and imports recorded in the balance of payments in a way that the balance of goods has been adjusted by the amounts above. The revision has not affected the CSO’s official foreign trade statistics. As a result of this methodological change, the NBH revised the balance of payments data for the years 2006 and 2007. All balance of payments data in this report have been calculated based on the revised methodology.

THE REPUBLIC OF HUNGARY

General

The Republic of Hungary (the “Republic” or “Hungary”) lies in Central Europe and covers an area of approximately 93,000 square kilometers (“km”). Hungary is bordered by seven countries: Slovakia and Ukraine to the north, Romania to the east, Serbia and Croatia to the south, and Slovenia and Austria to the west. The Danube River crosses Hungary, connecting the country with ports on the Black Sea. Hungary has historically been a nexus of social and cultural life and a trade link between Eastern and Western Europe. Hungary’s capital is Budapest.

Currently, the population of Hungary is approximately 10.0 million. Approximately 66% of the population lives in urban areas and approximately 1.7 million live in Budapest, which is the political, administrative, cultural and commercial centre of Hungary. While approximately 97% of the population is Magyar, there are minorities of Croat, German, Roma, Romanian, Serb and Slovak ethnicity.

The following table sets forth certain information with respect to the population growth rate in the Republic for the periods indicated:

The Population of Hungary


	As of January 1,
	2003			2004			2005			2006			2007			2008*
Population (in thousand persons)		10,142			10,117			10,098			10,077			10,066			10,045
Increase (decrease) in population (%)		(0.3	)		(0.2	)		(0.2	)		(0.2	)		(0.1	)		(0.2	)


Source: CSO

*		Preliminary data.

The following table sets forth the age distribution for the population of the Republic for the periods indicated:

The Age Distribution of the Population of Hungary


	As of January 1,
Age (in years)	2003		2004		2005		2006		2007		2008*
	(Number of persons, in thousands)
0-9		1,018		998		981		968		966		965
10-19		1,260		1,247		1,233		1,210		1,188		1,163
20-29		1,590		1,576		1,534		1,487		1,451		1,411
30-39		1,352		1,378		1,432		1,494		1,540		1,570
40-49		1,466		1,416		1,352		1,300		1,264		1,258
50-59		1,345		1,376		1,414		1,458		1,488		1,483
60-69		1,029		1,033		1,048		1,048		1,053		1,070
70-79		769		766		766		761		755		753
80-89		272		285		294		309		324		335
90 +		41		42		44		42		40		37


Source: CSO

*		Preliminary data.

Political System

Transformation and New Constitution

Immediately after World War II, Hungary was governed by a “grand coalition” of Hungarian political parties. By 1948, however, all non-communist parties had been abolished with the support of the Soviet Union. The Hungarian Socialist Workers’ Party dominated all facets of government until 1990.

During the late 1980s, the political system in Hungary changed dramatically. On October 23, 1989, Hungary was proclaimed a republic and, to signify the country’s change in status to a free democratic state, Hungary’s name was changed from the “Hungarian People’s Republic” to the “Republic of Hungary.” Also in 1989, the constitution was substantially amended to its current form. Under this new constitution, Hungary instituted a multi-party democratic government, making it one of the first formerly communist countries in Central and Eastern Europe to undertake democratic reforms. Non-communist political parties were established in 1989, and in 1990 the first multi-party elections in the country since 1947 took place.

President

The President of the Republic is the head of the state, elected by Parliament for a term of five years. The President may, but need not, be elected from the members of Parliament (but cannot be both President and a member of Parliament at the same time). The President may only be re-elected once. The current President is Mr. László Sólyom, who was elected in 2005. The President’s authority is limited. Most of the actions taken

by the President require the countersignature of the Prime Minister or the appropriate minister. The main powers of the President include:

	•		representing the nation as head of state;

	•		concluding international treaties and agreements on behalf of the Republic (agreements that are legislative in character require the prior consent of Parliament);

	•		safeguarding the democratic operation of the political process;

	•		acting as commander-in-chief of the armed forces;

	•		setting the date for Parliamentary and local elections;

	•		initiating certain measures in Parliament;

	•		initiating referenda;

	•		appointing and removing, among others, the President and Vice-Presidents of the NBH; and

	•		granting pardons.

Government

The government of Hungary consists of the Prime Minister and other ministers forming the Cabinet (currently 14 ministers, of which two are without portfolio). The Prime Minister and the government’s program are approved by a simple majority vote of Parliament. The Prime Minister is elected for four years by Parliament upon the proposal of the President. If for some reason, such as removal through a no-confidence vote, resignation or death, the Prime Minister loses the office and the Government its mandate, a new Prime Minister will be elected by the Parliament with a mandate that expires after the next general election. The other ministers are proposed by the Prime Minister and appointed and removed by the President. The government is charged with the executive function of the Republic and proposing legislation to Parliament.

The Parliament re-elected the former Prime Minister, Mr. Ferenc Gyurcsány, on June 9, 2006. Mr. Ferenc Gyurcsány has been the Prime Minister since October 4, 2004. See “– Recent Political Developments.”

Parliament

The single-chamber Hungarian Parliament is the country’s supreme legislative body. The Parliament elects the President, the Prime Minister, the members of the Constitutional Court, the President and Vice-Presidents of the State Audit Office, the President of the Supreme Court and the Attorney General.

The Parliament is elected by popular vote for four-year terms. Elections are held using a combination of individual constituency voting (the candidate receiving the most votes in a particular district being elected from that district) and proportional voting (parties receiving at least 5% of the popular vote proportionally dividing a set number of seats). The Republic last held parliamentary elections in April 2006. See “– Recent Political Developments.”

Judiciary

The Hungarian judiciary consists of the Supreme Court, the county courts, the Metropolitan Court of Budapest and the local and labor courts. Legislation may provide for special courts to be convened for certain types of cases. Three Courts of Appeal located in Budapest, Pécs and Szeged were established with regional jurisdiction on July 1, 2003 and began their operations at that time. Two more Courts of Appeal with regional jurisdiction located in Debrecen and Gyõr were established in July 2004 and began their operations on January 1, 2005. The Supreme Court sets guidelines for the judicial process of every court. Resolutions of the Supreme Court concerning uniformity are binding on all courts of the Hungarian judiciary. Judges of the Republic are independent and are subordinate only to the law. Local courts have original jurisdiction. The Courts of Appeal, the county courts and the Metropolitan Court of Budapest have both appellate and original jurisdiction. The President of the Republic nominates and Parliament elects the President of the Supreme Court. The President of the Supreme Court nominates and the President of the Republic appoints the Vice-Presidents of the Supreme Court. The President of the Republic also appoints and removes professional (non-

arbitration) judges. The President of the Republic may only remove professional judges for cause using procedures prescribed by law.

The Constitutional Court is separate from the regular Hungarian judiciary. It decides on the constitutionality of legislation and other actions as set forth in the Hungarian Constitution. The Constitutional Court may annul any law or legal measure that it determines to be unconstitutional. Any person may initiate proceedings in the Constitutional Court to address issues within its jurisdiction. Parliament elects the eleven members of the Constitutional Court. Justices of the Constitutional Court serve for nine-year terms.

Legislation facilitating and regulating the market economy is relatively new. Consequently, Hungarian courts are generally less experienced than their Western European counterparts in areas such as securities, banking and commercial law. Parties often refer disputes relating to such matters to the court of arbitration attached to the Hungarian Chamber of Commerce and Industry or the Permanent Court of Arbitration of Financial and Capital Markets.

Parliamentary Commissioners

Pursuant to the Data Protection and Freedom of Information Act of 1992 and the Act on the Parliamentary Commissioner of 1993, Parliament elects the Parliamentary Commissioner for Civil Rights, the Parliamentary Commissioner for Data Protection and Freedom of Information and the Parliamentary Commissioner for National and Ethnic Minorities’ Rights (such commissioners are also known as Ombudsmen). Each Ombudsman is elected for a period of six years (with the first such election having taken place in 1995) and is exclusively responsible to Parliament. The principal role of the Ombudsmen is to help defend the public’s rights vis-à-vis the public administration.

Any individual who alleges that a proceeding, decision or action (including any omission to act) of, or taken by, any administrative or governmental authority and certain other entities caused the violation of his or her rights or that such violation is imminent may apply to the Ombudsmen to help protect his or her respective rights. In addition to monitoring and supervising data protection and the freedom of information in general and exercising the competence of an Ombudsman in the relevant area, the Data Protection Commissioner’s tasks also include, most importantly, the maintenance of the Data Protection Register and providing opinions on related legislative proposals and categories of official secrets. Pursuant to the Act on State and Official Secrets of 1995, the Parliamentary Commissioner for Data Protection is also entitled to change the classification of state and official secrets.

At the end of 2007 the Act on the Parliamentary Commissioner of 1993 was amended, and the position of Parliamentary Commissioner for Future Generations was created. This Ombudsman is responsible for controlling the implementation of the regulation ensuring the sustainability and improvement of the environment and nature.

Local Government

Hungary is divided into administrative units, which include the capital (Budapest), counties, cities/towns and villages. Local governments are autonomous, democratically manage local affairs and may set the rates of certain limited local taxes. The Hungarian Constitution grants all local authorities the same fundamental rights; however, the duties and responsibilities of local governments may differ according to national and local legislation. Local governments consist of representative bodies, whose members are elected for four-year terms. Decisions of local authorities may only be revised if they conflict with the Constitution or national legislation. Local government elections were last held in October 2006.

Recent Political Developments

The Republic held Parliamentary elections in April 2006. Nominees of the following parties gained mandates: the Hungarian Socialist Party (“HSP”), the electoral partnership comprised of Fidesz-Hungarian Civic Union (“Fidesz”), the Christian Democrats People’s Party (“CDPP”), the Alliance of Free Democrats (“AFD”) and the Hungarian Democratic Forum (“HDF”). The following table sets forth the results of the 2006 Parliamentary elections as published by the Hungarian National Election Office (the “NEO”):


			Share of
	Number of		seats
	seats		(%)
AFD		18		4.66
Fidesz		164		42.49
HDF		11		2.85
HSP		186		48.19
HSP/AFD Joint Candidate		6		1.55
Independent Representatives		1		0.26

Total		386		100.00


Source: NEO

Composition of Current Parliament


			Share of
	Number of		seats
	seats		(%)
AFD⁽¹⁾		19		4.94
Fidesz		138		35.84
HDF		10		2.60
HSP		190		49.35
CDPP		23		5.97
Independent Representatives		5		1.30

Total⁽¹⁾		385		100.00


Source: Parliament of Hungary

Note:

(1)		Mr. Ferenc Gegesy, a former member of the AFD, forfeited his mandate as of September 15, 2008.

No single party won a majority of the Parliamentary seats in the 2006 elections. HSP and AFD were able to form a coalition government with a combined total of 210 of the 386 Parliamentary seats. Leaders of the two coalition parties forming the new government signed a coalition agreement on May 29, 2006. The former Prime Minister, Mr. Ferenc Gyurcsány, was proposed by the President to the Parliament to be elected as the new Prime Minister. On May 30, 2006, he handed in the new government program. On June 9, 2006, the government was formally inaugurated. During April 2008, the minority coalition partner AFD decided to leave the coalition. On May 5, 2008, the current minority government led by Mr. Ferenc Gyurcsány was sworn in.

The next Parliamentary elections are scheduled for 2010.

Local Government Elections

The following table shows the results of the last local government elections, which were held in October 2006:

Local Government Elections Results


			County
	Budapest		government		Municipalities
	(percentage of total vote)
HSP–AFD		47.46		34.87		11.19
Fidesz		47.42		54.14		17.72

County

Budapest

government

Municipalities

(percentage of total vote)

Other

5.12

10.99

71.09

Total

100.00


Source: NEO

As of the date of this document, the composition of the local governments has not changed substantially since the last elections held in October 2006. The next local government elections are scheduled to take place in 2010.

European Parliament Elections

The first elections of Hungarian members to the European Parliament were held on June 13, 2004. The following table shows the political affiliation of the Hungarian members of the European Parliament after the election:

Seats in European Parliament


	Seats
Fidesz		12
HDF		1
HSP		9
AFD		2


Source: European Parliament

The next European Parliament elections are scheduled for 2009.

International Relations

Hungary has undertaken an active foreign policy designed to further its integration into the world community and to foster regional peace and economic development. Hungary joined the United Nations organization (the “UN”) in 1955 and is a member of many of its specialized agencies such as UNESCO, FAO, UNIDO, WHO and WTO (as described below). In 1996, Hungary officially became a member of the Organization for Economic Co-Operation and Development (the “OECD”), which was a decisive step towards integrating with the developed nations and obtaining full European Union (“EU”) membership. In 1999, Hungary became a full member of the North Atlantic Treaty Organization (“NATO”). Hungary maintains diplomatic relations with approximately 165 countries and is a member of a number of international organizations in addition to the UN, OECD, NATO and the EU, including the Global Environment Protection Fund, World Trade Organization (“WTO”), the International Bank for Reconstruction and Development (the “IBRD” or the “World Bank”), the Organization for Security and Co-Operation in Europe, the International Monetary Fund (the “IMF”), the Council of Europe, the International Finance Corporation (“IFC”), the Central European Free Trade Agreement (“CEFTA”), the International Development Agency, Food and Agriculture Organization (“FAO”), the World Health Organization (“WHO”), the European Bank for Reconstruction and Development (“EBRD”), the United Nations Educational Scientific and Cultural Organization (“UNESCO”), the United Nations Industrial Development Organization (“UNIDO”), the European Investment Bank (“EIB”) and the Council of Europe Development Bank (“CEB”). Hungary is also a member of the Central European Initiative, the other members of which are Austria, Italy, Slovenia, Croatia, Slovakia, Poland and the Czech Republic. The Central European Initiative mainly addresses issues of regional infrastructure development. Hungary has been a member of the Organization for Security and Co-Operation in Europe (formerly referred to as the Conference on Security and Co-Operation in Europe) since its formation in 1975 and was admitted to the Council of Europe in 1990.

European Union

Hungary joined the EU on May 1, 2004. Hungarian representatives in the European Parliament assumed the following positions: Mr. Szabolcs Fazakas (HSP) became the Chairman of the European Committee on Budgetary Control (“BUDG”), Mr. Pál Schmitt (European People’s Party-European Democrats) became the Vice-Chairman of the Committee on Culture and Sport (“CULT”), Ms. Zita Gurmai (HSP) assumed the position of Vice-Chairwoman of the Committee on Women’s Rights and Equal Opportunities (“FEEM”), and Ms. Katalin Lévai (HSP) became the Vice-Chairwoman of the Committee on Civil Liberties, Justice and Home Affairs. Furthermore, Mr. József Szájer and Ms. Magda Kósáné Kovács became Vice-Floor leaders of the European People’s Party-European Democrats and the Party of European Socialists, respectively.

Hungary is entitled to delegate one member to the European Commission. The current Hungarian delegate to the European Commission is Mr. László Kovács (HSP), acting as the Commissioner for Taxation and Customs Union.

The implementation of the Schengen System was a crucial issue in the EU accession negotiations. Hungary became fully integrated into the Schengen System in the beginning of 2008. The configuration of an information network compatible with the Schengen Information System (“SIS-II”), a principal pre-condition to integration into the Schengen System, has been completed.

Alongside the development of key areas of the economy, the Republic has implemented and intends to continue implementing development programs and structural reforms to speed the convergence process with the EU. The key program was the National Development Plan, which was approved on December 19, 2002 and which addressed the allocation of EU funds from 2004 to 2006. The government published the first version of the second National Development Plan, the “New Development Plan,” which addressed the allocation of EU funds from 2007 to 2013. On September 7, 2007, the European Commission adopted the New Development Plan which included seven regional and eight sector programs. Overall, Hungary will derive a EUR 25 billion benefit under the New Development Plan.

The financial flows between the Republic and the EU from 2004 to 2006 are discussed under “Public Finance – EU Net Position.”

For information about the Republic’s strategy as regards its participation in the Exchange Rate Mechanism and the adoption of the Euro, see “Public Finance – Medium-Term Fiscal Program and the Convergence Programme.”

THE ECONOMY

Background

The Hungarian economy has undergone a radical transformation since the fall of communism in 1989. As with other post-communist countries in the region, the economy in Hungary during the last 15 years can be characterized by economic dislocation at the beginning of the 1990s, with gradual improvement as reforms were implemented. The highlights of these economic reforms and trends include:

	•		an ambitious privatization program – the vast majority of Hungary’s large state-owned enterprises have already been privatized. See “Privatization”;

	•		a shift in exports from countries formerly participating in the Council for Mutual Economic Assistance (“COMECON”) to those of Western Europe and other industrialized countries. Currently, approximately three-quarters of Hungarian exports are to EU markets. See “Balance of Payments and Foreign Trade – Foreign Trade”;

	•		gross and net external debt have declined sharply since the mid-1990s, and the structure of external debt has changed. Meanwhile, the ratio of the public sector debt to GDP dropped from 72% in 1996 to 50.6% in 2001, but has increased since 2001, reaching 61.4% in 2007. See “National Debt”;

	•		GDP has generally grown at a rate which was higher than average EU growth rates. The rate adjusted for calendar day effect reached 4.0% in 2006, 1.3% in 2007, 1.0% in the first quarter of 2008 and 2.0% in the second quarter of 2008. See “The Economy – Recent Economic Performance – Gross Domestic Product”;

	•		inflation has decreased dramatically since the end of 1995 from 28.3% to 3.3% as of the end of 2005. By April 2006, the inflation rate diminished further to 2.3%, partly as a result of the reduction of the VAT rate. However, by March 2007, the inflation rate had increased to 9.0%, mainly as a result of the increase of the VAT rate and regulated energy prices, but has decreased since then, reaching 6.5% in August 2008. See “The Economy – Recent Economic Performance – Inflation”;

	•		foreign direct investment (the total amount of capital invested in Hungary from abroad) has generally increased since 1995, reaching EUR 66.3 billion as of the end of 2007. During the three-month period ended March 31, 2008, the balance of net direct investment amounted to EUR 449.3 million inflow, compared to a EUR 152.3 million inflow during the same period in 2007. See “Balance of Payments and Foreign Trade – Foreign Direct Investment”; and

	•		levels of the general government deficit based on GFS as a percentage of GDP have fluctuated significantly since 2000. The general government deficit as a percentage of GDP decreased to 3% in 2001, and increased to 10% in 2002. This increase in 2002 was partly a result of increased government spending and the assumption of additional debt to finance certain public works projects (including certain highway projects). Between 2002 and 2005, the general government deficit as a percentage of GDP generally decreased, reaching 4.8% of GDP in 2005, but increased to 9.2% in 2006. The government deficit as a percentage of GDP decreased in 2007, reaching 5.4% according to preliminary data.

Recent Economic Performance

The following table sets out certain macroeconomic statistics regarding the Republic for the periods indicated:

Selected Macroeconomic Statistics


	December 31,										First		Second
											quarter of		quarter of
	2003		2004		2005		2006		2007⁽¹⁾		2008⁽¹⁾		2008⁽¹⁾
Economic Data⁽²⁾
Nominal GDP (HUF billions)		18,940.7		20,718.1		22,042.5		23,795.3		25,405.8		6,156.8		6,878.5
Real GDP (growth in %)		4.2		4.8		4.1		3.9		1.3		1.7		2.0
Real exports (growth in %)		6.2		15.6		11.5		19.0		14.2		13.9		11.1


																First			Second
	December 31,															quarter of			quarter of
	2003			2004			2005			2006			2007⁽¹⁾			2008⁽¹⁾			2008⁽¹⁾
Real imports (growth in %)		9.3			13.4			6.8			14.7			12.0			10.2			11.2
Rate of unemployment (as of the period end (%))		5.5			6.3			7.3			7.5			7.7			8.0			7.6
Consumer prices (growth in %)		4.7			6.8			3.6			3.9			8.0			6.9			6.8	⁽⁵⁾
Producer prices (growth in %)		2.4			3.5			4.3			6.5			0.2			n/a			n/a
State Budget; Public and External Debt⁽³⁾
State budget surplus (HUF billions)⁽⁴⁾		(1,103.5	)		(1,327.9	)		(1,067.6	)		(2,199.0	)		(1,363.0	)		(508.1	)		(213.9	)
as a % of GDP		(5.8	)		(6.4	)		(4.8	)		(9.2	)		(5.4	)		(8.3	)		(3.1	)
Total revenues (HUF billions)⁽⁴⁾		6,339.3			6,835.3			7,620.0			8,208.0			10,484.4			2,989.3			3,096.9
as a % of GDP		33.5			33.0			34.6			34.5			41.3			n/a			n/a
Public debt (HUF billions), unconsolidated		10,587.7			11,592.4			12,765.6			14,676.7			15,585.5			16,155.1			15,965.8
as a % of GDP		55.9			56.0			57.9			61.7			61.3			n/a			n/a
External public debt (HUF billions)		2,579.0			2,983.5			3,590.7			4,124.4			4,472.6			4,663.5			4,506.6
as a % of GDP		13.6			14.4			16.3			17.3			17.6			n/a			n/a
Balance of Payments Data⁽⁶⁾
Current account (EUR billions)⁽⁷⁾		(5.9	)		(7.1	)		(6.7	)		(6.8	)		(6.5	)		(1.6	)		(1.8	)
as a % of GDP		(7.9	)		(8.6	)		(7.5	)		(7.5	)		(6.4	)		n/a			n/a
Exports (EUR billions)⁽⁷⁾⁽⁸⁾		46.0			53.2			60.0			69.0			80.8			21.4			22.2
Imports (EUR billions)⁽⁷⁾⁽⁸⁾		48.9			55.6			61.1			69.8			79.5			20.9			21.6
NBH’s foreign exchange reserves (EUR billions)		10.1			11.7			15.7			16.4			16.4			16.8			17.3


Sources: Hungarian Central Statistical Office, NBH, Ministry of Finance

Notes:

(1)		Preliminary data.

(2)		Derived from data published by the CSO.

(3)		Derived from the government budget as published by the Ministry of Finance.

(4)		Local governments are not included for 2008.

(5)		Average data for the first half of the year.

(6)		Derived from data published by the NBH.

(7)		Calculated using the yearly average HUF/USD exchange rate.

(8)		Including goods and services.

Gross Domestic Product

The following table presents the nominal GDP at current market prices, as well as real GDP growth rates, per capita GDP and USD equivalents for the periods indicated:

Gross Domestic Product


											First		Second
	December 31,										quarter of		quarter of
	2003		2004		2005		2006		2007		2008		2008
					(HUF billions, except as indicated)
GDP		18,940.7		20,718.1		22,042.5		23,795.3		25,405.8		6,156.8		6,878.5
Annual real GDP growth rate(%)⁽¹⁾		4.1		4.6		4.2		4.0		1.3		1.0		2.0
Per capita GDP (in HUF)⁽³⁾		1,867,488.3		2,047,904.4		2,182,953.1		2,361,446.4		2,523,882.1		612,893.0		685,241.3
U.S. Dollar Equivalents:
GDP (USD billions)⁽²⁾		84.4		102.2		110.4		113.0		138.2		32.0		37.3
Per Capita GDP (USD)⁽²⁾⁽³⁾		8,320.7		10,106.6		10,933.1		11,217.9		13,729.3		3,182.1		3,719.6


Source: CSO


Notes:

(1)		Data adjusted for calendar day effect.

(2)		Calculated according to the average HUF/USD exchange rate of the corresponding period calculated by the NBH.

(3)		Calculated according to population as of the beginning of the corresponding period.

Although the rate of economic growth in Hungary has been declining since 2000, the rate of real GDP growth in Hungary has generally been higher than the average growth recorded in the EU as a whole. The economic growth in Hungary since 2000 has mainly been attributable to an increase in exports and, in particular for 2002 and 2003, an increase in domestic consumption. The increase in domestic consumption was mainly a result of budget expenditures and government measures (such as the increase of the minimum wage, increased mortgage subsidies and public sector wage increases). In 2004, 2005 and 2006, the growth in domestic consumption decreased, although the decrease has been offset by an increase in exports and, in 2004 and 2005, an increase in investment in Hungary generally, resulting in an increase in GDP of 4.6%, 4.3% and 4.0% for 2004, 2005 and 2006, respectively. In 2006, the growth of consumption was low (year-on-year growth rate reached 1.4%), and the level of investment dropped by 2.1% for 2006 compared to 2005, while export growth rates remained high (year on year growth reached 17.9% during 2006). In 2007, the growth rate reached only 1.3%. This low growth rate was mainly due to a 2.2% decrease in consumption. Gross fixed capital formation increased by only 1.0 % while exports grew by 14.2% compared to 2006. In the first quarter of 2008, total consumption decreased, but in the second quarter of 2008 it increased. Gross fixed capital formation declined in both the first and the second quarter. Exports grew at a high level in both quarters, as did imports.

The following table indicates the sector composition of GDP in each of the periods indicated:

Sector Composition of GDP⁽¹⁾


											First		Second
	December 31,										quarter of		quarter of
	2003		2004		2005		2006		2007		2008		2008
	(percentage of contribution)
Agriculture, forestry and fishing		3.7		4.1		3.7		3.6		3.6		3.2		7.5
Mining and quarrying, manufacturing and electricity		21.6		21.6		21.7		21.8		21.7		25.6		21.1
Of which:
Manufacturing		18.9		18.8		19.0		19.4		19.2		21.9		18.8
Construction		4.1		4.2		4.2		4.1		3.6		2.2		3.4
Services, total		56.4		55.3		56.1		56.8		57.2		55.7		55.0
Of which:
Trade, repair, hotels and restaurants		11.2		10.9		10.8		11.3		11.6		10.7		11.6
Transport, storage and communication		6.7		6.8		6.6		6.7		6.8		6.8		6.6
Financial intermediation and real estate activities		18.0		17.8		18.6		19.2		19.8		18.6		18.3
Public administration, education, health and social services		16.9		16.2		16.3		15.9		15.3		16.0		14.7
Other community, social and personal service activities		3.6		3.6		3.7		3.7		3.8		3.6		3.8

GDP, total		100.0		100.0		100.0		100.0		100.0		100.0		100.0


Source: CSO

Note:

(1)		Indirect taxes are not included.

Inflation

The following table illustrates the year-on-year change and the yearly average change in the Consumer Price Index (the “CPI”) and the Producer Price Index (the “PPI”) for each of the years indicated:

Inflation


	2003		2004		2005		2006		2007
	(%)
CPI (yearly average)		4.8		6.8		3.6		3.9		8.0
CPI (year-on-year)		5.7		5.5		3.3		6.5		7.4
PPI (yearly average)		2.4		3.5		4.3		6.5		0.2
PPI (year-on-year)		6.2		1.6		4.7		4.5		1.6


Source: CSO

Deregulation since 1990 has led to a high rate of inflation in Hungary. This rate was relatively high in the 1990s compared to rates in Western Europe due to the general phasing out of price supports and the high public sector deficit. However, the rate of inflation has generally been declining since the introduction of a new monetary regime in May 2001.

There was a long-term deviation in the downward trend of inflation in 2004, with consumer prices increasing at an average inflation rate of 6.8% in 2004 as compared to 4.8% in 2003. This increase was primarily a result of a rise in value added tax (“VAT”) from 12% to 15% for selected goods and an increase in the excise duty levied on certain goods (including tobacco and fuel) as of January 1, 2004, which increased the effective cost of products and services, and was partially offset by lower food prices as a result of the good harvest in 2004 due to favorable weather conditions. The effect on inflation of the increases in VAT and excise duty has steadily diminished, resulting in a CPI of 3.3% in November 2005. The reduction of inflation in 2005 was also partially a result of favorable global market conditions, the relatively strong and stable forint/Euro exchange rate and lower food prices caused by the good harvest in 2004 and 2005 due to favorable weather conditions. As of January 1, 2006, the general VAT rate of 25% was reduced to 20%. In the first months of 2006 the inflation rate decreased significantly, reaching 2.3% in April 2006, but then the inflation rate increased due to higher energy and food prices as well as the depreciating HUF rate and an increase in the VAT rate, reaching 6.5% in December 2006. In the first half of 2007, the inflation rate increased significantly, reaching 9.0% in March 2007, mainly as a result of base effect and a significant increase in regulated prices. The inflation rate declined slightly since then reaching 6.5% in August 2008.

Price Regulation

As of the end of 2007, approximately 80% of all prices in Hungary were unregulated. The main categories of products whose prices remain regulated are electricity, gas, purchased heating, various pharmaceutical products, meals at schools, kindergartens and nurseries, the state lottery, local and long-distance passenger transport, state-owned housing rent, various household utilities (including water and sewage charges and refuse collection services) and postal services.

In line with relevant EU Directives, the Republic intends to abolish regulated pricing schemes from the increasingly market-based energy and postal sectors. Deregulation of the energy sector began in July 2004. The entire energy sector has been deregulated including the residential segment; however, if electricity is provided by a so-called universal service provider, retail electricity prices are capped by regulation. In February 2006, Parliament approved a bill on the temporary regulation of prices paid by Magyar Villamos Müvek Zrt. (“MVM”, a state-owned energy company in Hungary) for energy produced by power plants. Under the current rules, deadline for deregulation of the postal services is the end of 2012.

Wages

The following table sets forth year-on-year changes in nominal and real wages for the periods indicated:

Wages


													First half of
	2003		2004			2005		2006		2007			2008
						(%)
Nominal net wage index		14.3		5.7			10.3		7.5		2.8			7.3
Real wage index		9.2		(1.0	)		6.5		3.5		(4.8	)		0.5


Source: CSO

Real wages grew by 14.3% in 2003 as compared to 2002. The growth in real wages in 2003 was primarily a result of an increase in the salaries of employees of the public education and health care sectors by 50% in September 2002. Real wages decreased in 2004 as compared to 2003 primarily as a result of a change in the way the customary “13th month salary” was paid to public employees in 2004. As a result of a government decision, the customary “13th month salary” for public employees for 2004 was paid in January 2005, rather than in December 2004 as in previous years. During 2005 and the first half of 2006, real wages grew significantly, but in the second half of the year the real wages index decreased. As of December 31, 2006, real wages increased by 3.5% compared to December 2005. In 2007, real wages dropped by 4.8% compared to the previous year mainly as a result of the higher tax burden and increasing inflation rate. The high nominal net wage index in the first half of 2008 was caused partly by the different timing of the payment of the “13th month salary” in the public sector.

As with GDP growth, nominal and real wage changes have not been consistent across Hungary. Relatively stronger overall economic growth in western Hungary and a labor force that is generally reluctant to move from one part of the country to another have led to a substantial decrease in unemployment in western Hungary and disproportionately higher wage increases as compared to the rest of Hungary. Hungary’s incentive policies (mainly consisting of the promotion of investment in less developed regions, the development of the transport infrastructure and of human resources) and utilization of the Structural and Cohesion Funds of the EU are in part designed to increase employment levels in the eastern parts of the country.

Employment

The following table illustrates the general composition of employment and unemployment for each of the years indicated:

Unemployment


											First half of
	2003		2004		2005		2006		2007		2008
	(annual average, %)
Employed		50.6		50.5		50.5		50.9		50.9		56.3
Unemployed		3.2		3.3		3.9		4.1		4.0		4.8
Unemployment rate⁽¹⁾		5.9		6.1		7.2		7.5		7.4		7.8


Source: CSO

Note:

(1)		Based on the international sampling methodology pursuant to the guidelines of the International Labor Organization.

The unemployment rate in 2004 (calculated using the guidelines of the International Labor Organization) was 6.1%, which was lower than the EU average of 9% for the same period; however, it increased to 7.2% for 2005 and 7.5% for 2006 partly due to the increase in the activity rate (the number of persons registered with the government as being eligible to work). The unemployment rate declined to 7.4% in 2007 and increased to

7.8% in 2008. In previous years, the activity rate was generally lower partly due to the low mobility of the workforce in Hungary. Economic development has generally not been uniform throughout Hungary since 1990, with generally a higher concentration of jobs in Budapest and the central region of Hungary. The high costs (both time and the financial burden) generally discourage potential employees from traveling to distant workplaces, while discrepancies in real estate prices and inadequate housing rental opportunities have discouraged the relocation of Hungary’s workforce. This trend has been steadily decreasing, as new infrastructure investments (in particular Hungary’s highway construction projects) have brought new investment and job opportunities to less developed regions of Hungary thereby increasing the activity rate. Further, relatively high levels of taxation have led to the formation of a relatively large “grey economy,” with many employers avoiding to report their activities adequately (including with respect to hiring) in order to avoid paying taxes. Labor unions have not gained any significant influence in Hungary and to date have not caused any substantial work stoppages in Hungary. Labor unions are generally stronger in the public sectors of the economy in Hungary.

The increase of activity rate has been an important policy of the government, and a number of steps have been taken by the government to reduce the unemployment rate. In order to help reduce the social contributions burden of the workforce and the importance of the so-called “grey economy,” the monthly flat-rate health care contribution was reduced from HUF 3,450 to HUF 1,950 beginning as of November 2005. In addition, new laws were passed which took effect as of August 1, 2005 making it easier to employ part-time employees. Further, the government has introduced several initiatives aimed at helping currently unemployed workers find employment, including job-search assistance programs and adult vocational training programs. Lastly, the government has initiated the “START” program, which is aimed at helping first-time employees find employment. The START program provides, among other things, employers with employer contribution discounts for the hire of graduates under a certain age and certain other potential first-time employees.

The following table illustrates the general composition of employment in Hungary by major sector for each of the years indicated:

Composition of Employment by Sector


											First		Second
											quarter		quarter
											of		of
	2003		2004		2005		2006		2007		2008		2008
	(in thousands of persons)
Agriculture, hunting and forestry, fishing		107.6		101.2		98.2		93.9		89.9		83.0		88.7
Of which:
Forestry, logging and related service activities		8.7		9.1		8.7		8.8		9.2		7.5		9.5
Industry		801.9		785.4		762.9		752.5		745.6		747.5		746.2
Of which:
Mining and quarrying		6.0		5.4		5.2		4.9		4.7		4.5		4.5
Manufacturing		734.9		721.0		700.6		692.8		692.4		696.5		695.2
Electricity, gas and water supply		61.0		58.9		57.1		54.8		48.5		46.5		46.5
Construction		123.7		129.3		132.9		141.4		129.6		121.7		125.0
Wholesale and retail trade; repair of motor vehicles and household goods		313.1		336.0		341.9		350.7		355.0		365.6		364.6
Hotels and restaurants		79.9		82.1		82.7		81.6		86.3		86.5		88.9
Transport, storage and communication		224.1		223.6		222.2		220.1		214.6		210.5		212.2
Financial intermediation		53.7		54.2		56.9		60.5		67.0		69.6		70.0
Real estate, renting and business activities		174.8		198.1		212.8		219.8		234.8		250.5		249.0
Public administration and defence; compulsory social security		320.9		318.2		317.7		312.4		267.7		252.7		267.9
Education		252.9		255.5		255.1		253.6		273.4		269.3		270.2
Health and social work		222.7		225.4		220.4		216.9		210.0		200.5		202.8
Of which:
Human health activities		147.7		145.9		142.2		137.8		128.9		120.0		121.5
Social work activities		74.3		78.7		77.5		78.4		80.8		80.2		81.0


											First		Second
											quarter		quarter
											of		of
	2003		2004		2005		2006		2007		2008		2008
	(in thousands of persons)
Other community, social and personal service activities		77.8		80.6		82.9		86.8		86.7		82.6		84.3
National economy total		2,753.0		2,789.6		2,786.6		2,790.2		2,760.7		2,740.1		2,769.8
Of which:
Business sector		1,884.9		1,918.9		1,923.2		1,934.5		1,933.3		1,941.8		1,949.5
Budgetary institutions		818.7		816.6		805.9		788.3		748.6		715.0		731.3


Source: CSO

Principal Sectors of the Economy

Industry

The following table indicates the gross production indices by industry sector for the periods indicated:

Gross Production Indices by Industry⁽¹⁾


											First		Second
											quarter of		quarter of
	2003		2004		2005		2006		2007		2008		2008
	(volume indices, the volume of the previous year = 100)
Agriculture, forestry, fishing		100.0		153.4		98.6		92.9		86.0		106.3		133.8
Mining and quarrying, manufacturing and electricity		105.8		103.7		103.5		105.5		106.3		106.9		104.2
Of which:
Manufacturing		107.2		104.0		105.2		106.2		106.9		106.9		104.4
Construction		96.4		103.3		103.3		100.5		88.4		79.8		94.0
Services, total		104.1		102.6		104.7		104.6		101.3		100.9		100.1
Trade, repair, hotels and restaurants		105.3		103.0		104.7		107.8		101.6		100.0		99.3
Transport, storage and communications		103.0		106.1		103.1		105.8		104.1		103.6		101.0
Financial intermediation and real estate activities		104.3		103.1		107.1		106.0		103.0		102.1		99.6
Public administration, education, health and social work		104.6		101.0		103.1		101.0		97.6		99.7		101.3
Other community, social and personal service activities		99.1		100.6		103.3		101.5		102.2		99.3		99.0
Gross domestic product, total (at purchaser’s price)		104.2		104.8		104.1		103.9		101.3		101.7		102.0


Source: CSO

Note:

(1)		Data unadjusted for calendar day effect.

General. For each of the last five years, more than half of total industrial production was exported. Industrial export sales increased by 14.7% in 2004, compared to 10.8% in 2003 and grew by 11.1% in 2005, 14.4% in 2006 and 16.5% in 2007. In the first seven months of 2008, export sales increased by 7.1% compared to the same period in 2007. Domestic sales decreased by 0.9% in 2004 compared to 2003; however, they grew by 4.0% during 2005, 3.8% during 2006 and 2.6% during 2007. In the first seven months of 2008, domestic sales increased by 1.8% compared to the same period in 2007. For each of the last five years, approximately two-thirds of total industrial exports have been attributable to the following two segments: manufacturing of electrical and optical equipment and manufacturing of transport equipment. Both segments recorded high growth in 2007 and in the first seven months of 2008, with electrical and optical equipment exports increasing by 19.4% and 7.4% and transport equipment exports increasing by 16.4% and 7.8%, respectively.

Manufacturing. In 2007, manufacturing output (representing approximately 90% of industrial production) grew by 8.8%, compared to 10.9% in 2006. During the first seven months of 2008, manufacturing output increased by 4.8% compared to the same period in 2007. In 2007, export sales increased by 15.9% compared to 2006 and accounted for 54% of total sales. In the first seven months of 2008, export sales of manufactured products increased by 7.3% compared to the same period in 2007.

Electrical and Optical Equipment. In 2007, the production of electrical and optical equipment represented more than a quarter of total manufacturing production in Hungary, growing by 13.5% as compared to 2006. In 2007, export sales from the production of electrical and optical equipment accounted for approximately 40% of total manufacturing exports (representing the largest share of all manufacturing sub-segments). In 2007, exports of electrical and optical equipment increased by 19.4% compared to 2006.

During the first seven months of 2008, electrical and optical equipment production increased by 6.3% compared to the same period in 2007.

Transport Equipment. In 2007, the manufacturing of transport equipment increased by 15.8%, principally as a result of increased exports. Export sales in this sub-segment increased by 16.4% in 2007 as compared to a growth of 27.0% in 2006. During the first seven months of 2008, the volume of transport equipment production grew by 8.8% compared to the same period in 2007. During the first seven months of 2008, the volume of transport equipment exports grew by 7.8% compared to the same period in 2007.

Energy imports declined by 1.7% in 2007 compared to 2006. The volume of imports increased significantly in 2005, and in 2006 and 2007, it remained at a high level. The export of energy is less than the import of energy (30.3% of all imports of energy); it increased by one-third compared to 2006. The price index of imported energy increased by approximately 5% compared to 2006, and its share of total imports decreased from 11.0% in 2006 to 9.6% in 2007. Between 2003 and 2005, the increasing prices were mainly attributable to higher energy prices in foreign currency. In 2006 and 2007, the exchange rate fluctuations of the forint played an important role, too. In 2007, the deficit of energy trade has decreased by approximately HUF 240 billion. The two most important energy products are oil and gas.

Oil and gas. The volume of crude oil and refined oil imports in 2007 increased by 1.5% compared to 2006. The volume of gas imports in 2007 declined by 8.7% compared to 2006.

Energy, gas and water supply. In 2007, the total energy consumption amounted to 1,120 PetaJoule. The total energy consumed was 2.8% less compared to 2006. 33% of the total consumption was covered by domestic production, and 67% was covered by imports. The volume of domestic production decreased by 2.5% compared to 2006. The share of carbons and hydrocarbons in production decreased from 54% in 2006 to 49% in 2007. The share of nuclear energy resources increased from 34% in 2006 to 38% in 2007. The volume of imported energy resources decreased by 4.0% compared to 2006. Production from renewable energy sources amounted to 12.5% of the total domestic production. In 2007, approximately 33% of Hungary’s total energy demand was supplied by domestic energy sources. Approximately 11.6% of the total energy consumed was produced from coal (the majority of which was domestically produced), and approximately 68.5% of energy consumption consisted of hydrocarbon which was imported primarily from Russia.

Hungary has consistently worked to diversify its sources of energy and to build up reserves to help reduce the potential negative effects of disruptions in energy supplies. Hungary is currently maintaining a reserve of at least a 12-week supply of oil in compliance with OECD requirements.

All of Hungary’s natural gas distribution companies, six electricity distribution companies and all but two of its power generation companies have been privatized. The Ministry of Transport, Telecommunication and Energy is aiming to help create and maintain a competitive electricity market and to fully liberalize the sector, in accordance with EU Directives.

The following table provides certain information regarding the composition of consumption of the main energy resources in Hungary in each of the years 2003 through 2007:

Composition of Consumption of Energy Resources


	2003		2004		2005		2006		2007
	(%)
Coal		12.5		13.1		10.9		11.6		12.6
Hydrocarbon		70.6		68.5		69.7		68.5		67.5
Of which:
Crude oil and petroleum products		28.4		23.7		25.8		26.8		27.5
Natural gas		42.2		44.8		43.9		41.7		40.0
Other resources		16.9		18.1		19.4		19.9		19.9

Total		100		100		100		100		100

Of which:
Domestic		36.3		39.0		37.1		37.2		37.8
Imports		63.7		61.0		62.9		62.8		62.2


Source: Hungarian Energy Office

Construction

In 2007, the output of the construction sector decreased by 4.8% compared to 2006, mainly as a result of a slowdown in the housing sector and a decline in public infrastructure projects. The construction of buildings increased by 10.1%, while civil engineering works dropped by 20.6% compared to 2006. The output of the construction sector in the first half of 2008 fell by 10.9% compared to the same period in 2007, mainly as a result of a slowdown in the housing sector and a decline in public infrastructure projects.

Service Industries

Gross value added by services increased slightly by 1.3% in 2007 and in the first two quarters of 2008 (increasing by 0.9% and by 0.1% in the first and second quarters, respectively). The relatively slow growth of the services industry in 2007 was primarily a result of a significant reduction in the public administration, education, health and social care sector. In the first two quarters of 2008, the private sectors’ dynamics were also decelerating mainly as a result of weak domestic demand.

The following table sets forth the composition of the service industry per individual sub-sector for the periods indicated:

Composition of Service Industry per Sub-Sector


											First		Second
	December 31,										quarter of		quarter of
	2003		2004		2005		2006		2007		2008		2008
Trade, repair, hotels and restaurants		19.8		19.7		19.3		19.9		20.2		19.2		21.1

Transport, storage and communications		11.9		12.2		11.8		11.7		11.8		12.1		12.0
Financial intermediation and real estate activities		31.9		32.2		33.2		33.8		34.6		33.5		33.2

Public administration, education, health and social work		30.0		29.3		29.1		28.1		26.7		28.7		26.8

Other community, social and personal service activities		6.4		6.5		6.6		6.5		6.7		6.5		6.8

Services, total		100.0		100.0		100.0		100.0		100.0		100.0		100.0


Source: CSO

Agriculture

In 2007, agriculture had an unfavorable year, as the quantity of the harvested cereals decreased by 32.4% compared to 2006, and was 29.1% lower than the average for the years 2002 through 2006. The reason was the unfavorable weather conditions in 2007. Among the cereals, the average yield of maize decreased by 47.2%, and the average yield of wheat diminished by 11.8% compared to 2006. Compared to the average for the years 2002 through 2006, the average yields of wheat and maize both decreased by 9.8% and 41.0%, respectively. The total harvested amount of sugar beet and sunflower in 2007 decreased by 31.7% and 11.7% respectively; the amount of rape seed increased by 46.2%, while the amount of potatoes and alfalfa hay dropped by 5.0% and 21.9%, respectively, compared to the harvested amount in 2006.

Infrastructure

Hungary is a landlocked country and is located at the crossroads of several important transport corridors for the region. Three main road corridors (forming part of the Trans-European Network), three corridor branches and various railways and water corridors cross Hungary. With Budapest as a node, several corridors connect Hungary to the Trans-European Network. Hungary plays a central role in international transport connections for Central and Eastern Europe and for South-Eastern Europe towards the West and the East. However, compared to Western European countries, the transport network in Hungary is less developed, suffering from a shortage of river bridges, a lack of transversal connections, poor technical parameters and a low proportion of expressways.

Currently, the national road network of the Republic is approximately 30,700 km long, of which motorways account for approximately 650 km. The density of motorways in Hungary is approximately one-fourth of the EU average.

By the end of 2006, all infrastructural investments of the State Highway Management Company Limited by Shares (Állami Autópálya Kezelõ Zrt., the “ÁAK Zrt.”) were taken over by National Motorway Company Limited by Shares (Nemzeti Autópálya Zrt., the “NA Zrt.,” currently National Infrastructure Developing Private Company Limited (Nemzeti Infrastruktúra Fejlesztõ Zrt., the “NIF Zrt.”)). Despite the public-private partnership (“PPP”) type financing plans, all investments were financed through bank loans, the majority of which were assumed by the central budget at the end of 2006.

In 2007, the government has changed its previous plan relating to “Program Motorways” which was expected to be constructed by the ÁAK Zrt. using a PPP framework. The development of the road network became a state task, and the government decided to finance the construction from the central budget. Infrastructure projects will be managed by NIF Zrt., while the maintenance of motorways will be the responsibility of ÁAK Zrt. in the future. Accordingly, a new program for the development of transportation for the years 2008 through 2013 has been established which utilizes both the sources derived from the New Development Plan and the PPP framework.

Hungary has one international airport (Ferihegy International Airport in Budapest) that currently meets the majority of the air traffic needs of the country. Since May 2006, several transportation companies provided aerial transportation services between European cities and airports at Sármellék, Debrecen, Gyõr-Pér and Pécs-Pogány. In line with international trends, the traffic at Ferihegy International Airport has steadily been increasing over the last several years.

Navigation is possible along 1,600 km of the rivers in Hungary. There is commercial navigation on the Danube River and, to a very limited extent, on the Tisza River.

The telecommunications sector’s level of development, in both wireline and wireless communication, approaches the average level of other EU members. However, compared to Western European countries, the penetration rate in the area of internet connection is relatively low, the structure of the information-communications services market is not up to date and the proportion of broadband access is also relatively low.

PRIVATIZATION

Status of Privatization Efforts

Since 1990, the Republic of Hungary has privatized nearly 1,300 enterprises out of the 1,860 enterprises previously owned by the state. The Hungarian Privatization and State Holding Company (Állami Privatizációs és Vagyonkezelõ Zrt., or “ÁPV Zrt.”) manages these sales.

Most of the larger companies involved in the privatization program have already been partially or fully privatized. As of the end of 2006, only 83 companies were left for full privatization. Permanent government control is anticipated for 36 companies. The scope of property which is required to remain state-owned in the long term is defined by law as follows:

	•		national public utility service providers;

	•		property or companies of strategic importance for the national economy; and

	•		property or companies that accomplish tasks or fulfill objectives for national defense or other special purposes.

In 2003, the government announced an ambitious privatization program aimed at selling 18 to 20 of the remaining state-owned companies. Of these, the full privatization of Postabank and Konzumbank, and the partial privatization of FHB (Land Credit and Mortgage Bank) were completed in 2003. In 2004, the partial privatization of MOL (Hungarian Oil Company) and Dunaferr (a steel company) were completed. In March 2004, the targeted sale of 25% plus one vote of Hungaropharma (a pharmaceutical company) was accomplished. The issuance of an exchangeable bond on shares of Richter (a pharmaceutical company) was also completed in 2004. In 2004, revenues of about HUF 413 billion were raised through privatizations, and HUF 209 billion were paid to the central budget as a result of the privatization program.

On March 31, 2005, the ÁPV Zrt. declared the one-stage privatization procedure of Malév Hungarian Airlines unsuccessful, and decided to commence a negotiated privatization procedure. On April 6, 2005, 14 parties had expressed an interest and offers had been submitted to the ÁPV Zrt. for the 99.95% stake in Malév Hungarian Airlines. However, the negotiated privatization procedure was terminated by ÁPV Zrt. without result in August 2005.

In April 2005, ÁPV Zrt. began the tender process for the sale of a 75% plus one share of Antenna Hungária, one of the principal radio and television broadcasting companies operating in Hungary, in a two-stage privatization tender. Swisscom Broadcast AG won the tender process, offering HUF 46.75 billion (EUR 191 million) for all shares owned by ÁPV Zrt. and Forrás Rt. in Antenna Hungária. The sale was completed on October 25, 2005.

In June 2005, ÁPV Zrt. began the tender process for the privatization of Budapest Airport Rt. (“Budapest Airport”), the operator of Ferihegy Airport, Hungary’s only international airport. The British BAA International Holdings (“BAA”) achieved the highest score in the tender process and submitted the highest financial bid. BAA offered HUF 464.5 billion (EUR 1.83 billion) as the immediate transaction price, and pursuant to the contract entered into between ÁPV Zrt. and BAA for the privatization of Budapest Airport on December 18, 2005, BAA acquired the government’s 75% minus one share stake in Budapest Airport and the right to operate it for 75 years. The transaction was settled on December 23, 2005.

On May 8, 2006, MOL exercised a call option to buy 10,898,525 of its own previously issued shares from ÁPV Zrt. worth HUF 237.2 billion and constituting approximately 10% of all the outstanding MOL shares. The purchase was settled on May 29, 2006. On December 11, 2006, ÁPV Zrt. announced that the remaining shares of the company (approximately 1.7 % of the shares of MOL) were sold with the exception of 52 shares and a golden share. 159,858 shares were sold to retail investors. Afterwards, 1,733,566 shares were sold via the Budapest Stock Exchange. As of the end of 2006, the Republic owned one ordinary share and one share with priority voting rights of MOL.

On April 25, 2007, the privatization of Malev Hungarian Airlines was successfully completed. On February 23, 2007, ÁPV Zrt. and AirBridge Zrt. entered into an agreement for the sale of the state’s 99.95% stake in Malev Hungarian Airlines. The buyer paid HUF 200 million in exchange for the shares and agreed to invest approximately HUF 26 billion in Malev Hungarian Airlines.

On August 29, 2007, ÁPV Zrt. sold 50% plus one share of FHB raising privatization revenues of HUF 66.8 billion.

On January 1, 2008, the Republic consolidated its asset management and privatization operations into one entity, Magyar Nemzeti Vagyonkezelő Zrt. (“MNV Zrt.”) combining ÁPV Zrt., the Nemzeti Földalap (National Land Fund) and KVI (National Treasury Directorate).

Methods of Privatization Used

Hungary is unique in Central Europe in that a large majority of its privatizations are conducted through public tenders, with sales for cash consideration. These outright sales, often to strategic long-term investors, have been successful in bringing new management and know-how to many Hungarian enterprises.

Public offerings played an important and successful role in the privatization process, most recently, in the privatization of FHB at the end of 2003.

In recent years, the importance of compensation vouchers has decreased significantly. Compensation vouchers were the rights distributed to individual Hungarian citizens under the Compensation Act, which was designed to provide compensation for losses suffered, including the loss of property and personal freedom. These compensation vouchers entitled the holders to bid for shares in certain privatized entities. In 2003, in order to end the compensation voucher system, the government decided to offer the shares of FORRÁS Trust and Investment Company (a state-owned asset management company) in exchange for the compensation vouchers. The offering was completed in June and July 2003, and the shares of FORRÁS Trust and Investment Company were listed on the Budapest Stock Exchange.

BALANCE OF PAYMENTS AND FOREIGN TRADE

Balance of Payments

The following table sets out the balance of payments of Hungary for the periods indicated:


	Balance of Payments⁽¹⁾
	December 31,
	2003			2004			2005			2006			2007
							(EUR millions)
1. Goods, net		(2,898	)		(2,863	)		(2,210	)		(2,051	)		318
1.1 Exports		37,907			44,507			49,672			58,373			68,379
1.2 Imports		40,804			47,369			51,882			60,424			68,060
2. Services total, credit		8,123			8,672			10,351			10,625			12,445
Debit		8,075			8,188			9,219			9,379			11,394
Net		48			484			1,132			1,246			1,051
3. Income, credit		1,214			2,625			2,835			3,824			4,405
Debit		4,892			6,942			7,855			9,400			11,791
Net		(3,678	)		(4,317	)		(5,020	)		(5,577	)		(7,386	)
4. Current transfers, net		595			(382	)		(557	)		(412	)		(494	)
4.1. General government, net		118			(73	)		(586	)		(412	)		(448	)
4.2. Other sectors, net		477			(309	)		28			—			(47	)
I. Current account		(5,933	)		(7,078	)		(6,655	)		(6,794	)		(6,510	)
II. Capital account		(32	)		260			713			573			1,139
III. Financial account⁽²⁾		6,297			9,530			11,488			9,301			7,100
8. Direct investment, net		424			2,741			4,417			2,898			1,608
9. Portfolio investment, net		2,932			5,770			3,388			5,222			(789	)
10. Other investment, net		2,941			1,019			3,683			1,181			6,281
IV. Net errors and omissions		200			(1,184	)		(1,637	)		(2,112	)		(1,595	)
V. Overall balance (I+II+III+IV)		532			1,528			3,908			968			134
VI. International reserves		(532	)		(1,528	)		(3,908	)		(968	)		(134	)


Source: NBH

(1)		In 2003, there was a methodological change in the calculation of the balance of payment statistics related to reinvested earnings in order to bring the methodology in line with international standards. Reinvested earnings increase the current account deficit, but this increase is automatically financed, since reinvested earnings are also reported in the capital account. Thus, the current account deficit appears to increase, although in reality this is just a phenomenon of the change in the calculation methodology used. The data used in the tables and in the text is based on this new methodology.

(2)		Excluding international reserves.


	First		Second
	quarter of		quarter of
	2008		2008
	(EUR millions)
1. Real economic transaction, net		448		588
Export		21,374		22,182
Import		20,926		21,594
1.1. Goods, net		375		287
1.1.1. Export		18,601		18,896
1.1.2. Import		18,227		18,609
1.2. Services, net		73		301


	First			Second
	quarter of			quarter of
	2008			2008
	(EUR millions)
1.2.1. Export		2,773			3,286
1.2.2. Import		2,700			2,985
2. Income and current transfers, net		(2,095	)		(2,426	)
3. Current account balance, net		(1,647	)		(1,838	)
4. Financial account, net		788			126
5. Non debt creating financing, net		1,567			(1,018	)
6. Net external financing capacity		(859	)		(1,712	)
7. International reserves of the MNB		16,815			17,290
8. Gross foreign debt denominated in foreign currencies⁽¹⁾		64,606			67,506
9. Net foreign debt denominated in foreign currencies⁽¹⁾		(859	)		(1,712	)


Source: NBH

Note:

(1)		Excluding other capital.

Hungary has experienced a growing current account deficit from 2001 to 2004 (as a percentage of GDP), increasing from 6.0% in 2001 to 8.6% in 2004. The current account to deficit ratio has decreased since then reaching 6.4% in 2007.

In 2007, the current account deficit decreased to EUR 6,510 million largely due to strong external demand caused mainly by accelerating economic growth in Europe.

In the first half of 2008, the current account deficit increased to EUR 3.5 billion, 2.2% more than in the corresponding period of 2007.

See “- Foreign Direct Investment.”

Foreign Trade

The following table sets forth Hungary’s trade in goods by territory for the periods indicated:

Exports


										Countries
	European									joining
	Union			Non-EU						the EU			Asian		American
	countries			countries		Total		EU-15		after 2004			countries		countries
	(EUR millions)
2003		30,935			7,161		38,096		28,063		2,872			1,496		1,401
2004		35,453			9,165		44,618		31,572		3,881			1,955		1,606
2005		38,263			11,788		50,052		32,782		5,481			2,388		1,834
2006		43,815			15,120		58,935		36,130		7,685			3,117		2,003
2006		46,632	*		12,303		58,935		36,130		10,502	*		3,117		2,003
2007		54,588	*		14,416		69,004		41,271		13,317	*		3,346		2,047
2008H1		29,274	*		8,452		37,726		21,719		7,554	*		2,077		1,157


Source: CSO

Note:

*		Including Bulgaria and Romania.


	Food,				Fuels,				Machinery and
	beverages,		Crude		electric				transport
	tobacco		materials		energy		Manufactured goods		equipment		Total
	(EUR millions)
2003		2,484		786		621		10,928		23,277		38,096
2004		2,673		972		849		12,262		27,862		44,618
2005		2,891		993		1,365		13,816		30,987		50,052
2006		3,241		1,119		1,460		16,238		36,877		58,935
2007		4,320		1,314		2,003		18,288		43,079		69,004
2008H1		2,329		832		1,500		9,910		23,155		37,726


Source: CSO

Imports


										Countries
	European									joining
	Union			Non-EU						the EU			Asian		American
	countries			countries		Total		EU-15		after 2004			countries		countries
	(EUR millions)
2003		32,168			10,095		42,263		28,522		3,646			4,232		822
2004		34,789			13,744		48,533		30,310		4,479			7,035		1,065
2005		36,112			16,844		52,956		30,778		5,334			8,885		1,219
2006		41,703			19,612		61,314		34,906		6,797			9,667		1,296
2006		43,175	*		18,140		61,314		34,906		8,269	*		9,667		1,296
2007		48,226	*		20,898		69,124		38,548		9,677	*		11,815		1,490
2008H1		25,530	*		11,729		37,259		20,190		5,340	*		6,001		802


Source: CSO

Note:

*		Including Bulgaria and Romania.


	Food,								Machinery
	beverages,		Crude		Fuels, electric		Manufactured		and transport
	tobacco		materials		energy		goods		equipment		Total
	(EUR millions)
2003		1,294		836		3,262		15,068		21,803		42,263
2004		1,784		900		3,523		16,642		25,684		48,533
2005		2,163		946		5,391		17,409		27,047		52,956
2006		2,433		1,037		6,753		19,782		31,309		61,314
2007		2,885		1,169		6,615		22,197		36,259		69,124
2008H1		1,607		688		4,625		11,855		18,485		37,259

Source: CSO

Hungary’s foreign trade in goods with industrialized countries (in particular, EU countries) has increased in recent years. EU countries accounted for 79.1% and 77.6% of Hungary’s exports and 69.8% and 68.5% of imports in 2007 and the first six months of 2008, respectively.

Trade Policy

Hungary has taken a number of steps since the beginning of the 1990s to integrate its economy into world trade.

EU. Upon accession to the EU, Hungary adopted all aspects of the Common Commercial Policy of the EU. This includes the application of the Common External Tariff, EU preferential trade agreements and regimes, WTO commitments and trade defense measures. The overall effect of these changes is that the trade regime of Hungary has become more open and transparent (for example, the average level of customs duties decreased by about 50% following the Republic’s accession to the EU, the country gained membership in the Agreement on Government Procurement, the Agreement on Trade in Civil Aircraft and the Information Technology Arrangement within the framework of the WTO). Further, by virtue of the Republic’s membership in the EU, it is also a member of the European Economic Area (“EEA”), of which Norway, Iceland, and Lichtenstein are members, in addition to the other countries that are members of the EU.

Bilateral Trade Agreements. In addition to the multilateral trade agreements discussed above, Hungary has also entered into bilateral trade agreements with several countries, including Slovenia, Romania, Turkey, Israel, Bulgaria, Lithuania, Latvia and Estonia. Hungary has entered into trade and co-operation agreements with certain Central European countries designed to lower or eliminate trade barriers.

Foreign Direct Investment

The following table sets forth historical records of foreign direct investment (“FDI”) in Hungary and Hungarian direct investments abroad during the years indicated:

Foreign Direct Investment


																First			Second
	December 31,															quarter of			quarter of
	2003			2004			2005			2006			2007			2008			2008
	(EUR millions)
Direct investment
Abroad		(1,463	)		(892	)		(1,756	)		(3,126	)		(2,765	)		(303	)		607
Equity capital and reinvested earnings		(1,358	)		(823	)		(1,933	)		(2,879	)		(2,640	)		(364	)		501
Other capital		(106	)		(69	)		177			(247	)		(124	)		62			106
In Hungary		1,887			3,633			6,172			6,024			4,373			799			1,127
Equity capital and reinvested earnings		1,123			3,309			5,884			3,421			3,347			1,553			(396	)
Other capital		764			324			288			2,603			1,026			(754	)		1,523
Net direct investment		424			2,741			4,417			2,898			1,608			497			1,735


Source: NBH

The level of cumulative FDI reached EUR 70.2 billion in December 2007, which constitutes approximately 69% of the GDP for the year 2007. In 2003, due to the expansion abroad of major Hungarian companies, such as OTP and MOL, the FDI outflow was significantly higher compared to previous years, which explains an approximately 60% decrease in the net FDI in 2003. The remainder can be attributed to the unfavorable global investment environment, which has led to moderate investment in Hungary. In 2004, 2005 and 2006, due to the favorable global and regional investment environment, net FDI inflow was significantly higher than in 2003. In 2007, the net FDI inflow was significantly lower than in the year 2006 partly as a result of less favorable global investment environment.

The following table sets forth certain information regarding FDI in Hungary and Hungarian direct investments abroad during the six months ended June 30, 2008 as compared to the same period in 2007:

Foreign Direct Investment


	Six months ended June 30,
	2007			2008			% change
				(EUR millions)
Direct investment, net		(593.9	)		2,231.3			(375.7	)
Abroad, net		(1,401.2	)		304.7			(21.7	)
Equity capital and reinvested earnings, net		(1,381.4	)		136.9			(9.9	)
Equity capital, net		(1,249.9	)		(150.8	)		12.1
Reinvested earnings, net		(131.6	)		287.7			(218.7	)
Other capital, net		(19.7	)		167.8			(850.1	)
Assets, net		33.7			42.7			126.7
Liabilities, net		(53.4	)		125.1			(234.1	)
In Hungary, net		807.3			1,926.6			238.7
Equity capital and reinvested earnings, net		(1,117.0	)		1,157.2			(103.6	)
Equity capital, net		(372.4	)		378.4			(101.6	)
Reinvested earnings, net		(744.6	)		778.7			(104.6	)
Other capital, net		1,924.3			769.5			40.0
Assets, net		(115.6	)		(726.7	)		628.7
Liabilities, net		2,039.8			1,496.2			73.3


Source: NBH

During the six-month period ended June 30, 2008, the balance of net direct investment showed an inflow of EUR 2,231.3 million as compared to the EUR 593.9 million net outflow during the same period of 2007. This increase was primarily a result of direct investment in Hungary in the form of equity capital and reinvested earnings by foreign companies, which generated an inflow of EUR 378.4 million and EUR 778.7 million respectively during the six-month period ended June 30, 2008, compared to an outflow of EUR 372.4 million and EUR 744.6 million respectively during the same period of 2007. Other capital inflow in Hungary decreased by 40.0% during the six-month period ended June 30, 2008 as compared to the same period of 2007, reaching EUR 769.5 million inflow. Direct investments abroad amounted to EUR 304.7 million during the six-month period ended June 30, 2008 as compared to the EUR 1,401.2 million outflow during the same period of 2007. Other capital investments abroad increased to EUR 167.8 million inflow during the six-month period ended June 30, 2008 as compared to the outflow of EUR 19.7 million during the same period of 2007. Equity and reinvested earnings investments abroad amounted to an EUR 136.9 million inflow during the six-month period ended June 30, 2008 as compared to the EUR 1,381.4 million outflow during the same period of 2007.

In recent years, reinvested earnings in Hungary and foreign direct investment in the form of other capital have been relatively high, amounting to approximately half of the balance of net income on equities. Further, the increasing investment by Hungarian companies in the form of equity capital abroad has primarily been a result of certain Hungarian companies seeking to increase their footprint in the Central-Eastern European region generally.

Foreign Direct Investment by Industry⁽¹⁾

FDI flows (equity capital) abroad by economic activity, net (excluding SPEs)


	2003		2004		2005		2006		2007
					(EUR millions)
Agriculture, Hunting and Forestry		0.1		0.6		0.4		0.3		(0.9	)
Fishing		—		—		—		—		—
Mining and Quarrying		7.6		5.0		—		0.3		—
Manufacturing		876.8		90.9		775.3		82.7		673.1


	2003		2004			2005		2006			2007
						(EUR millions)
Of which:
Food Products, Beverages and Tobacco		22.6		(168.7	)		2.5		0.9			1.6
Textiles and Textile Products		0.1		0.1			—		0.3			0.1
Leather and Leather Products		0.2		—			—		—			—
Wood and Wood Products		—		—			0.2		—			—
Paper and Paper Products; Publishing and Printing		12.5		9.8			7.1		8.8			5.2
Coke, Refined Petroleum Products and Nuclear Fuel		823.8		241.5			111.3		(16.9	)		566.7
Chemicals and Chemical Products		9.8		13.0			5.7		32.8			81.3
Rubber and Plastic Products		0.4		3.1			3.6		(0.1	)		3.4
Other Non-Metallic Mineral Products		3.9		5.8			1.8		40.0			10.5
Basic Metals and Fabricated Metal Products		—		0.8			0.4		1.1			0.5
Machinery and Equipment		0.5		0.1			0.1		0.9			—
Electrical and Optical Equipment		2.8		(14.7	)		642.4		2.4			3.8
Transport Equipment		0.3		—			—		12.7			0.1
Manufacturing not elsewhere classified		—		—			—		—			—
Electricity, Gas and Water Supply		1.1		—			—		0.2			39.0
Construction		2.5		2.2			3.0		1.2			1.3
Services		357.8		303.6			994.9		2,090.6			1,257.8
Wholesale and Retail Trade; Repair of Vehicles		5.1		7.0			367.9		308.8			121.8
Hotels and Restaurants		1.1		2.1			2.9		6.4			(3.9	)
Transport, Storage, Postal Services and Communications		21.3		73.8			138.0		11.1			10.0
Financial Intermediation		285.0		53.6			288.9		1,536.6			216.6
Of which:
Monetary Intermediation		280.5		49.6			278.6		1,526.3			199.1
Other Financial Intermediation		0.6		—			0.7		(1.6	)		(1.3	)
Insurance Companies, Pension Funds		2.8		3.5			9.4		11.4			13.8
Real Estate Activities and Business Activities		45.2		167.1			197.1		219.9			911.5
Of which:
Real Estate		5.7		33.7			9.3		28.4			19.4
Computer Activities		—		1.2			0.2		—			2.4
Other Business Activities		39.5		132.2			187.7		191.4			888.9
Of which:
Manag. Holding Companies		32.6		129.8			189.1		139.5			824.3
Other Services		—		0.1			—		7.9			1.8
Not Allocated Economic Activity		5.1		2.3			15.0		(5.3	)		4.6
Purchase and Sale of Real Estate, Direct Investment of Households Abroad		29.7		21.2			48.8		15.0			67.3

Total		1,280.6		425.9			1,837.3		2,185.0			2,042.1

FDI flows (equity capital) in Hungary by economic activity, net (excluding SPEs)


	2003			2004			2005		2006		2007
							(EUR millions)
Agriculture, Hunting and Forestry		4.0			6.6			5.6		2.7		21.0
Fishing		—			—			—		—		—
Mining and Quarrying		(7.8	)		(0.7	)		2.5		25.1		26.7
Manufacturing		722.1			(71.6	)		371.5		209.5		1,549.7
Of which:
Food Products, Beverages and Tobacco		(195.2	)		21.5			43.7		19.5		30.7


	2003			2004			2005			2006			2007
							(EUR millions)
Textiles and Textile Products		—			2.4			2.8			1.4			8.3
Leather and Leather Products		0.6			0.1			—			—			0.3
Wood and Wood Products		9.6			23.9			2.8			16.8			0.2
Paper and Paper Products; Publishing and Printing		55.8			12.3			48.6			1.8			39.2
Coke, Refined Petroleum Products and Nuclear Fuel		—			46.0			—			379.1			1,236.5
Chemicals and Chemical Products		76.7			(298.1	)		6.9			(327.4	)		(124.2	)
Rubber and Plastic Products		(0.8	)		57.5			28.0			101.0			130.1
Other Non-Metallic Mineral Products		17.2			45.3			93.9			111.3			10.1
Basic Metals and Fabricated Metal Products		410.9			83.4			(3.9	)		(18.2	)		104.7
Machinery and Equipment		46.0			28.9			20.9			45.6			0.6
Electrical and Optical Equipment		283.7			(171.1	)		104.9			(175.9	)		72.4
Transport Equipment		15.7			74.1			19.1			51.0			40.0
Manufacturing not elsewhere classified		1.9			2.2			3.8			3.7			0.8
Electricity, Gas and Water Supply		3.4			(3.3	)		(0.1	)		117.3			(9.9	)
Construction		14.5			(34.1	)		29.6			5.2			38.0
Services		(1,526.4	)		1,023.4			3,337.4			1,130.5			(1,119.0	)
Wholesale and Retail Trade; Repair of Vehicles		(90.5	)		253.8			639.0			738.3			22.7
Hotels and Restaurants		1.5			(4.2	)		(15.3	)		2.4			19.7
Transport, Storage, Postal Services and Communications		113.7			339.5			341.9			133.3			7.2
Financial Intermediation		525.9			94.6			63.4			304.7			349.4
Of which:
Monetary Intermediation		503.6			53.8			22.0			319.1			321.8
Other Financial Intermediation		2.7			8.6			11.8			(1.5	)		10.1
Insurance Companies, Pension Funds		17.9			18.7			23.4			(14.7	)		12.6
Real Estate Activities and Business Activities		(2,075.7	)		336.0			2,298.4			(64.3	)		(1,535.0	)
Of which:
Real Estate		(127.6	)		83.7			204.8			118.9			205.8
Computer Activities		5.3			4.3			3.0			15.4			83.8
Other Business Activities		(1,964.2	)		243.5			2,078.9			(214.0	)		(1,827.0	)
Of which:
Manag. Holding Companies		(72.1	)		237.4			2,001.4			569.4			(2,481.6	)
Other Services		(1.4	)		3.7			10.0			16.0			17.0
Not Allocated Economic Activity		49.3			28.7			52.2			43.4			52.7
Purchase and Sale of Real Estate, Direct Investment of Households Abroad		76.8			132.7			167.5			248.9			284.8

Total		(664.1	)		1,081.6			3,966.2			1,782.6			844.0


Source: NBH

Note:

(1)		Reinvested profits are not included.

The following table sets forth the composition of net FDI into the Republic according to the country of origin for the periods indicated:

Foreign Direct Investment by Country of Origin⁽¹⁾

FDI flows (equity capital) abroad by the investments’ country, net (excluding SPEs)


	2003			2004			2005			2006			2007
							(EUR millions)
Europe		1,264.3			398.0			1,272.7			2,105.4			1,938.5
Albania		—			—			—			0.1			—
Austria		1.3			31.7			15.1			6.0			26.8
Belgium		2.3			0.3			4.9			(0.9	)		0.3
Belarus		—			—			—			—			—
Bulgaria		314.4			5.0			8.7			73.7			43.0
Cyprus		14.4			10.0			18.4			25.3			56.2
Czech Republic		(2.0	)		1.7			2.9			9.1			46.8
Denmark		3.7			(168.2	)		—			0.2			0.2
United Kingdom		0.4			1.4			1.5			44.9			646.9
Estonia		—			—			—			—			—
Finland		—			—			—			0.2			0.1
France		0.7			0.7			8.8			0.7			(2.8	)
Greece		—			—			0.5			—			—
Netherlands		(7.6	)		(4.5	)		643.0			57.6			42.6
Croatia		442.7			7.0			245.4			2.9			57.3
Iceland		—			0.1			—			—			—
Ireland		(0.2	)		(0.2	)		(1.6	)		(1.7	)		—
Poland		7.5			138.8			2.1			30.5			3.2
Latvia		0.1			0.2			—			—			—
Liechtenstein		—			2.1			2.1			8.4			5.4
Lithuania		—			—			—			—			—
Luxemburg		0.5			0.1			(21.9	)		(4.8	)		278.4
Macedonia		21.0			54.0			(0.1	)		—			—
Malta		—			—			0.9			0.5			—
Montenegro		—			—			—			—			5.9
Germany		9.5			14.2			19.3			4.9			32.0
Norway		—			(0.1	)		—			0.1			(0.4	)
Italy		0.4			1.4			1.9			0.4			470.9
Russia		0.2			3.5			0.6			383.8			33.6
Portugal		—			0.1			—			—			—
Romania		28.8			74.0			137.3			113.5			59.1
Spain		1.1			(0.4	)		2.4			0.8			(0.8	)
Switzerland		6.5			0.3			7.0			353.9			33.7
Sweden		—			0.2			(0.2	)		0.2			0.3
Serbia		4.8			7.5			160.0			315.5			29.6
Slovakia		373.6			208.7			9.6			32.4			7.3
Slovenia		7.8			2.9			0.4			(0.3	)		2.1
Turkey		30.5			—			—			(0.1	)		—
Ukraine		1.6			1.7			3.2			650.7			40.9
America		(6.0	)		5.4			12.0			51.8			23.8
North America		(6.0	)		4.2			12.0			51.1			21.4
United States		(6.2	)		3.6			12.2			50.6			21.2
Canada		0.2			0.6			(0.2	)		0.5			0.3
Central America		0.1			1.2			0.1			0.6			2.2
Mexico		—			—			—			0.3			—
South America		—			—			—			0.1			0.2
Argentina		—			—			—			—			0.1
Brazil		—			—			—			0.1			0.1
Chile		—			—			—			—			—


	2003		2004			2005			2006			2007
						(EUR millions)
Columbia		—		—			—			—			—
Uruguay		—		—			—			—			—
Venezuela		—		—			—			—			—
Asia		7.0		6.1			538.9			6.8			55.3
Near and Middle East		1.7		0.3			0.9			2.1			47.5
Iran, Islamic Republic of		—		—			—			—			—
Israel		1.7		0.3			0.7			3.0			47.3
Other Asian Countries		5.3		5.8			537.9			4.7			7.8
South Korea		4.6		3.9			533.6			—			—
Philippines		—		—			—			—			—
Hong Kong		—		0.1			1.2			—			—
India		—		0.5			0.8			—			—
Indonesia		—		—			—			—			—
Japan		—		0.5			0.1			1.0			6.5
China		0.7		0.6			2.0			3.4			1.0
Malaysia		—		—			—			—			—
Singapore		—		0.1			0.3			—			—
Taiwan		—		—			—			—			(0.1	)
Thailand		—		0.1			—			0.2			—
Africa		—		(0.2	)		0.7			(0.3	)		3.7
North Africa		—		—			0.1			—			—
Egypt		0.1		—			—			—			—
Morocco		—		—			—			—			—
Other African Countries		—		(0.2	)		0.6			(0.3	)		3.7
South Africa		—		(0.2	)		(0.3	)		(0.2	)		0.1
Oceania & Polar Regions		0.5		0.2			0.5			0.6			0.5
Australia		0.5		0.2			0.4			0.5			0.4
New Zealand		0.1		—			0.1			0.1			0.1
International Organisations		—		—			—			—			—
Not allocated		14.7		16.3			12.4			20.6			20.4

Total		1,280.6		425.9			1,837.3			2,185.0			2,042.1

EU		413.7		239.2			708.2			205.9			1,712.9
EU-15*		12.4		(123.0	)		673.9			108.4			1,495.1
EMU		8.2		43.6			672.6			63.1			849.9


Source: NBH

Note:

*		Member states before 2004.

(1)		Reinvested profits are not included.

FDI flows (equity capital) in Hungary by the investors’ country, net (excluding SPEs)


	2003			2004			2005		2006		2007
							(EUR millions)
Europe		(819.6	)		782.2			3,767.3		1,599.5		836.3
Albania		—			—			—		—		—
Austria		305.5			(264.7	)		118.6		252.0		1,494.6
Belgium		53.2			94.8			2.6		60.2		76.2
Belarus		—			0.2			—		—		—


	2003			2004			2005		2006			2007
							(EUR millions)
Bulgaria		—			1.3			0.2		—			0.2
Cyprus		(79.7	)		22.4			14.0		32.2			(96.5	)
Czech Republic		2.9			0.2			16.6		3.5			27.2
Denmark		1.1			23.3			8.7		87.2			(3.5	)
United Kingdom		27.2			52.4			2,458.1		24.9			(1,900.8	)
Estonia		—			—			—		—			—
Finland		4.1			17.2			6.1		7.3			8.3
France		50.3			4.5			86.5		54.3			71.9
Greece		0.1			0.4			0.3		1.0			0.8
Netherlands		9.2			424.8			380.1		(390.1	)		310.8
Croatia		(0.8	)		1.9			0.2		(0.5	)		40.3
Iceland		—			—			0.7		(0.1	)		0.1
Ireland		9.7			28.5			45.8		64.6			15.7
Poland		0.2			1.4			3.2		4.2			10.6
Latvia		0.3			2.2			0.6		(0.9	)		0.1
Liechtenstein		5.4			72.0			15.6		2.8			(18.3	)
Lithuania		—			(0.1	)		—		0.1			0.5
Luxemburg		(1,872.9	)		(268.5	)		24.9		50.9			52.0
Macedonia		—			—			—		—			1.1
Malta		0.4			(0.7	)		0.2		0.4			0.8
Montenegro		—			—			—		—			—
Germany		148.9			464.7			286.1		1,211.0			580.6
Norway		1.6			3.5			0.9		0.8			0.9
Italy		38.3			24.3			22.9		30.3			132.6
Russia		(0.1	)		1.0			0.4		4.4			1.3
Portugal		0.1			—			0.4		0.1			71.8
Romania		1.4			0.1			1.7		7.6			0.6
Spain		418.1			9.1			13.7		46.0			233.4
Switzerland		37.3			42.8			247.8		26.2			(311.0	)
Sweden		15.6			22.5			9.2		(0.5	)		8.2
Serbia		(0.2	)		0.1			0.2		3.2			(0.1	)
Slovakia		1.0			—			2.7		3.2			1.1
Slovenia		—			0.4			0.2		1.9			3.9
Turkey		0.3			0.3			0.8		10.3			4.5
Ukraine		0.5			0.1			2.5		0.3			0.4
America		63.7			117.5			40.2		86.8			(51.3	)
North America		78.1			124.8			30.8		(122.4	)		61.3
United States		77.5			124.8			29.4		149.1			60.8
Canada		0.6			—			1.3		(271.5	)		0.5
Central America		(14.7	)		(7.5	)		8.5		209.4			(112.8	)
Mexico		—			—			—		—			—
South America		0.2			0.1			0.9		(0.2	)		0.2
Argentina		0.2			—			0.2		—			0.1
Brazil		(0.1	)		—			0.1		—			0.1
Chile		—			—			—		—			—
Columbia		—			—			—		(0.2	)		—
Uruguay		—			—			0.5		—			—
Venezuela		0.1			—			—		—			0.1
Asia		45.1			137.5			119.4		81.2			13.8


	2003			2004			2005			2006			2007
							(EUR millions)
Near and Middle East		1.7			3.6			(23.0	)		(2.7	)		14.3
Iran, Islamic Republic of		0.1			0.5			0.1			0.1			0.5
Israel		3.2			3.1			(23.2	)		(5.1	)		2.6
Other Asian Countries		43.3			133.9			142.4			83.9			(0.5	)
South Korea		5.4			16.3			4.9			37.7			0.3
Philippines		—			—			—			—			—
Hong Kong		0.5			(0.5	)		3.3			0.2			(1.9	)
India		0.3			—			0.3			0.1			—
Indonesia		—			0.1			0.1			—			0.1
Japan		32.3			102.5			132.4			43.5			(1.5	)
China		3.6			12.9			5.3			4.7			1.7
Malaysia		—			1.6			—			(0.1	)		—
Singapore		0.2			(0.3	)		(4.2	)		0.9			0.1
Taiwan		1.1			1.0			—			(3.4	)		—
Thailand		—			—			—			—			—
Africa		0.5			1.5			1.9			(2.5	)		(0.7	)
North Africa		—			—			0.2			0.2			—
Egypt		—			—			0.1			0.1			—
Morocco		—			—			—			—			—
Other African Countries		0.5			1.5			1.7			(2.7	)		(0.7	)
South Africa		(0.1	)		—			(0.1	)		—			—
Oceania & Polar Regions		1.6			1.4			(0.1	)		(17.8	)		(0.4	)
Australia		1.2			1.2			(0.1	)		(1.3	)		(0.3	)
New Zealand		(0.1	)		—			—			0.1			(0.1	)
International Organisations		2.7			—			1.3			—			—
Not allocated		41.9			41.6			36.3			35.3			46.3

Total		(664.1	)		1,081.6			3,966.2			1,782.6			844.0

EU		(866.4	)		658.9			3,501.6			1,543.7			1,101.4
EU-15*		(791.5	)		633.1			3,464.1			1,499.1			1,152.8
EMU		(835.5	)		535.0			988.1			1,387.6			3,052.7


Source: NBH

Note:

*		Member states before 2004.

(1)		Reinvested profits are not included.

Foreign Exchange Reserves

The following table presents the level of Hungary’s gold and foreign exchange reserves as of the dates indicated:

Gold and Foreign Exchange Reserves


	December 31,								August 31,
	2003		2004		2005		2006		2007		2008
					(EUR millions)
International net gold reserves⁽¹⁾		33.4		31.7		42.9		47.6		55.8		56.2
Foreign exchange⁽²⁾		10,108.4		11,670.9		15,678.4		16,349.1		16,329.7		17,253.6

Total		10,141.7		11,702.6		15,721.3		16,396.8		16,385.5		17,309.8


Source: NBH

Notes:

(1)		Gold valued at London rates fixed on the relevant date.

(2)		Consists of foreign currencies, including the counterparts of swapped gold, converted at exchange rates at the dates shown.

MONETARY AND FINANCIAL SYSTEM

National Bank of Hungary

The NBH is the central bank of Hungary. Its primary objective is to use monetary instruments to achieve and maintain price stability and, without prejudice to this objective, to support the economic policy of the government. These instruments include:

	•		setting the central bank base rate (the rate for the NBH’s main policy instrument, the two-week deposit facility) and the setting of rates for overnight deposit and lending facilities;

	•		establishing the minimum reserve requirements for commercial banks;

	•		conducting open market operations, which include sales and purchases of government securities from commercial banks and engaging in other similar transactions to regulate liquidity within the economy; and

	•		determining and implementing the exchange rate policy in agreement with the government.

The NBH is a company limited by shares, with a registered capital of HUF 10 billion. 100% of the shares in the NBH are owned by the Republic, and the NBH is regulated by a special act, Act LVIII of 2001 on the National Bank of Hungary (the “National Bank Act”). The supreme body of the NBH is the General Assembly with the Finance Minister representing the Republic as the sole shareholder. The Monetary Council is the highest monetary policy decision-making body of the NBH. The Monetary Council holds meetings at least once every two weeks, and makes the most important decisions concerning the general activities of the NBH, including the setting of the official interest rate.

In accordance with the latest regulation of the National Bank of Hungary (the Act No. LVIII of 2001 on the National Bank of Hungary, the “National Bank of Hungary Act”), the number of Monetary Council members amounts to a minimum of five and maximum of seven members. According to the new regulation, the Governor, the Deputy Governors of the National Bank of Hungary and four other members can become a member of the Monetary Council. However, the other members of Monetary Council nominated earlier shall remain in their offices until the end of their respective mandates. Therefore, currently the Monetary Council consists of 11 members.

On December 21, 2006, the NBH decided to issue two-week bonds instead of accepting two-week deposits. According to the evaluation of the NBH, the measure has no effect on the conduct of monetary policy. The reason for the change was to enhance the development of the financial sector and the liquidity management of the banks.

Monetary Policy

As set forth in Hungarian law, the NBH is responsible for achieving and maintaining price stability. In June 2001, the Monetary Council decided to conduct its monetary policy within the framework of inflation targeting, which is supplemented by an exchange rate regime using a wide fluctuation band. See “— Exchange Rate Policy.” The inflation targets were 4.5% for the end of 2002, 3.5% for the end of 2003, 3.5% for the end of 2004, 4% for the end of 2005, 3.5% for the end of 2006 and 3% for each year following 2006. The NBH tolerates a deviation of plus or minus 1% from the inflation targets.

The main monetary policy instrument used by the NBH to keep the rate of inflation within the target band is its two-week deposit facility. The NBH periodically accepts unlimited two-week deposits at the central bank base rate (i.e., the main official interest rate). Furthermore, the NBH reduces the volatility of overnight interest rates by maintaining an interest rate band around the central bank base rate. The width of the band is plus or minus 1% (the active overnight repo rate is 1% above and the passive overnight deposit rate is 1% below the official rate).

The following table sets forth indicative interest rates of the NBH as of the dates shown:

Selected Interest Rates


`	December 31,										August 31,
	2003		2004		2005		2006		2007		2008
NBH base rate⁽¹⁾		12.5		9.5		6.0		8.0		7.5		8.5	⁽¹⁾
Real rate⁽²⁾		6.4		3.8		2.6		1.4		0.7		1.9	⁽³⁾

Sources: Central Statistical Office, NBH

Notes:

(1)		Two-week rate.

(2)		The real rate is calculated as follows: (1 + central bank base rate)/(1 + year-on-year inflation rate as of year-end) – 1, where interest rates are expressed as decimal numbers.

(3)		Calculated according to the latest available (August 2008) CPI data.

The NBH raised interest rates several times during 2003 to 12.5% in an effort to help prevent the forint from depreciating against the Euro. Beginning in March 2004, the NBH began reducing the central bank base rate gradually as market confidence began improving. The central bank rate stood at 6.0% at the end of 2005. Since June 2006, the NBH raised the base rate gradually, due to higher inflation risks. The central bank base rate stood at 8.00% as of December 31, 2006. As inflation prospects improved in the summer of 2007, the NBH started to reduce the central bank base rate. As of December 31, 2007, the base rate stood at 7.50%. Since April 1, 2008, the NBH started raising the base rate gradually, due to higher inflation risks. As of November 11, 2008, the base rate stood at 11.50%.

Primarily as a result of the past depreciation of the forint, the increase in VAT in 2004 and the ongoing fiscal deficit, the NBH anticipated that the inflation target for 2004 (3.5%, plus or minus 1%) would not be achieved and abandoned its inflation target. The NBH has therefore started to focus its inflation rate targeting primarily on 2005, for which the target rate was 4% (plus or minus 1%). The inflation target rate for 2006 was 3.5% plus or minus 1%. The 12-month inflation rate for 2006 was 6.5%, and thus the NBH missed the targeted rate mainly as a result of the recently announced new fiscal policy. The government and the central bank set an inflation target of 3% plus or minus 1% for 2007 and the following years. According to the latest Report on Inflation, published in August 2008, there is a high probability of not achieving the 2008 and 2009 inflation targets mainly as a result of increasing global oil prices and rising food prices caused by a poor harvest in 2007. In the Report on Inflation, the NBH estimated 2009 average annual inflation to be 4.1%, which is higher than the 3% long-term inflation target rate. According to the Report on Inflation, the 2010 average annual inflation shall be 3% and in line with the long-term inflation target. In August 2008, the 12-month inflation rate was 6.5%.

Since 2001, the NBH has also reformed the minimum reserves system. The required reserve ratio was reduced from 17% in 1995 to 5% in August 2002. The cut in the effective reserve ratio was intended to contribute to the narrowing of the spread between deposit and lending rates. In parallel with the reduction of the minimum reserves ratio, the NBH gradually increased the interest rate paid on the reserves. Since May 1, 2004 (the date of the Republic’s accession to the EU), the reserves carry an interest rate equal to the central bank base rate. This increase in interest on reserves was instituted with a view to increasing the profitability of the banks and to help eliminate the indirect taxation of banks in accordance with the European Bank’s guidelines.

The NBH does not use money supply targets as an instrument of monetary policy. The money supply flexibly adjusts to the money demand, which is indirectly influenced by the monetary policy. Increases in monetary aggregates are slowing due to the decrease in the rate of inflation.

The following table provides information about the composition of the money supply as of the dates indicated:

Money Supply


											As of July
	December 31,										31,
	2003		2004		2005		2006		2007		2008
	(HUF billions)
M1		4,028		4,169		5,189		5,833		6,348		6,259
Quasi-money⁽¹⁾		4,548		5,258		5,464		6,080		6,589		7,191
M2⁽²⁾		8,575		9,427		10,653		11,913		12,937		13,451
Securities of financial institutions		213,658		380,641		577,910		872		1,259		1,243
M3		8,789		9,808		11,231		12,785		14,196		14,693

Source: NBH

Notes:

(1)		Quasi-money = fixed term forint deposits + all foreign currency deposits.

(2)		M2 = M1 + quasi-money.

Exchange Rate Policy

According to the National Bank Act, the NBH and the government jointly determine the framework of the exchange rate regime. The NBH then decides on the exchange rate policy issues within that framework. As a result of a joint decision in May 2001, the forint was “pegged” to the Euro such that the exchange rate was permitted to shift against the Euro in either direction by up to 15% against the central parity, which was set to HUF 276.1/Euro in May 2001. In combination with the adoption of the inflation targeting framework in June 2001, these policies were consistent with the primary objective of the NBH of achieving and maintaining price stability. These changes allowed the NBH greater flexibility to resume an anti-inflationary policy.

During 2001 and 2002, the NBH kept the central bank base rate high in order to reduce inflation to the target level. This led to a gradual appreciation of the forint against the Euro during the year from HUF 245/Euro at the start of the year to HUF 236/Euro by December 31, 2002.

In early 2003, strong portfolio inflows pushed the forint to the upper band limit of HUF 234.7/Euro. In order to help maintain the target HUF/EUR exchange rate band, the NBH intervened in the foreign exchange market by selling forint and cut interest rates on January 15 and 16, 2003 in aggregate by 200 basis points. The rate cutting was accompanied by the widening of the overnight interest rate band to 3% in order to stem the flow of short-term speculative money into Hungary. Subsequently, the forint fluctuated to around HUF 245/Euro until June 2003.

In June 2003, the government and the NBH decided to shift the central parity by 2.26% to HUF 282.3/Euro. This unexpected measure, and the growing uncertainty regarding Hungarian monetary conditions, caused a depreciation in the forint of roughly 10% to HUF 265/Euro in June 2003, prompting the NBH to raise interest rates in defense of the Hungarian currency by a total of 300 basis points, a level higher than that in effect at the beginning of 2003.

This increase stabilized the forint below the HUF 260/Euro level until the end of November 2003, when it again weakened sharply. In order to support the forint and defend its medium term inflation target, the NBH increased the central bank base rate by another 300 basis points, up to 12.5% at the end of November 2003. As a result of this action and the gradual improvement in fiscal prospects, the forint strengthened significantly and has traded around the HUF 250/Euro level. As a result of the stable HUF/Euro exchange rate, the NBH reduced interest rates cautiously in 2004 and 2005 without causing significant depreciation of the forint. Since June 2006, the NBH raised the base rate gradually from 6.00% due to higher inflation risks. The NBH increased the central bank base rate to 8.00% on October 25, 2006, where it remained as of December 31, 2006. In the summer of 2007, the inflation rate started to decrease and the NBH decreased the central bank base rate to 7.75% on June 26, 2007. The central bank base rate stood at 7.50% as of December 31, 2007.

On February 25, 2008, in agreement with the Government, the Monetary Council decided to abandon the flexible peg of the forint to the euro within a fluctuation band and adopt a floating exchange rate regime, with effect from February 26, 2008. According to the Monetary Council, the floating exchange rate regime provides

the central bank with better conditions to achieve its inflation target and, through this, to meet the nominal convergence criteria and finally to enter into the European Exchange Rate Mechanism II (“ERM II”).

In the spring of 2008, the inflation outlook deteriorated as a result of higher food and energy prices, and the NBH increased the central bank base rate to 8.00% on April 1, 2008. Subsequently, the NBH increased the central bank base rate to 8.25% on April 29, 2008, to 8.50% on May 27, 2008 and to 11.50% on October 22, 2008. The central bank base rate stood at 11.50% as of November 11, 2008.

The HUF/Euro exchange rate as of November 11, 2008 was HUF 268.47 per EUR 1.00.

Foreign Exchange and Convertibility of the Forint

Since 1996, Hungarian foreign exchange regulations have been consistent with the convertibility standards of Article VIII of the IMF and with the regulations of the OECD.

Since January 1998, Hungarian residents have been able to purchase shares and debt instruments with a maturity of at least one year issued by all OECD-based issuers, and non-residents have been able to issue such instruments denominated in foreign currency in the Hungarian securities market. Since January 1998, Hungarian companies and individuals have also been able to receive foreign exchange denominated loans with a maturity of more than one year (with certain reporting obligations) and have been able to take out foreign exchange denominated loans with a maturity of less than one year, with approval from the NBH.

In accordance with the continuing liberalization of restrictions on capital movements in recent years, the forint has been fully convertible since June 2001, both in terms of current transactions and capital transactions. All principal restrictions relating to foreign investment have been removed: non-residents have unrestricted access to Hungarian short-term securities, HUF-denominated accounts and the onshore derivatives market, and residents have unrestricted access to offshore financial services and short-term foreign securities. Certain minor restrictions have remained, the principal objectives of which are the prevention of money laundering. The full convertibility of the forint meets all current EU requirements.

The Hungarian Banking System

In April 2000, the supervisory agencies for commercial banks, investment activities, pension funds and insurance activities were integrated under one single agency — the Hungarian Financial Supervisory Authority (in Hungarian: Pénzügyi Szervezetek Állami Felügyelete). However, there are separate legislative regimes for banking, insurance, pension funds and investment services. Currently, the laws for insurance, banking and pension funds are well established and generally comply with all applicable EU directives and regulations.

Since 1991, Hungary’s banking system has been subject to a regulatory and supervisory framework based on principles and guidelines of the BIS. Act CXII of 1996 on Credit Institutions and Financial Enterprises (the “Credit Institutions Act”), in effect since January 1, 1997, endeavors to facilitate harmonization of the Hungarian banking system with EU uniform banking standards.

Supervision of the Hungarian Banking System

Supervision of banking activities in Hungary has improved as the banking system has developed. NBH supervisory responsibilities have largely been transferred to the Hungarian Financial Supervisory Authority from the NBH, with the NBH retaining a more limited supervisory role.

Role of the NBH

While the NBH has no legal obligation to support Hungary’s credit institutions, the NBH may serve as a lender of last resort to credit institutions that encounter temporary liquidity difficulties.

Role of the Hungarian Financial Supervisory Authority

Other than credit institutions having their seat in an EU Member State (which are regulated by their respective home supervisory authority), all financial institutions operating in Hungary are required to procure a license from the Hungarian Financial Supervisory Authority before they may establish themselves, commence operations, establish a representative office or a subsidiary abroad, elect its management, acquire shares of a non-resident entity representing a qualifying holding (10%) or terminate its operations.

The Hungarian Financial Supervisory Authority is responsible for verifying compliance by credit institutions operating in Hungary with the Credit Institutions Act and applicable banking regulations. The Hungarian Financial Supervisory Authority is entitled to impose various sanctions on credit institutions, including issuing warnings of non-compliance, withdrawing licenses, instituting liquidation proceedings and imposing fines on credit institutions and the managers of such credit institutions.

Banking Regulations

The government or the Finance Minister (and not the Hungarian Financial Supervisory Authority) has the power to issue regulatory decrees. Act CXX of 2001 on the Capital Markets (the “Capital Markets Act”) and the Credit Institutions Act set forth matters upon which the government or the Finance Minister may issue such regulatory decrees.

The Credit Institutions Act requires Hungarian credit institutions to maintain a solvency ratio of 8%. Pursuant to its authority under the Credit Institutions Act, the Finance Minister has issued a decree on the calculation of the solvency ratio. The decree adopts BIS standards prescribing how the ratio of a bank’s regulatory capital and risk-weighted assets (on- and off-balance sheet items) must be calculated. In addition, the Finance Minister has issued decrees requiring credit institutions to create provisions based both on the quality of their assets (which include loans, investments and off-balance sheet items) and on certain foreign country risks present in their assets.

Portfolio risk provisions are calculated by categorizing the assets of a credit institution into the following categories: standard, watch, sub-standard, doubtful and bad. Assets are placed in the categories based on the performance of the asset and the financial condition of the debtor. Provisions are made based on the asset category: 0% for standard assets; 0% to less than or equal to 10% for watch assets; greater than 10% to less than or equal to 30% for sub-standard assets; greater than 30% to less than or equal to 70% for doubtful assets; and greater than 70% to 100% for bad assets.

Hungary has harmonized its guidelines on capital adequacy requirements for investment firms and commercial banks with EU Council Directive 93/6/EEC on the capital adequacy of investment firms and credit institutions. The adaptation of EU Directive 2006/48 and EU Directive 2006/49 (Basel II) has been finalized by the beginning of 2008. Individual banks are required to create their own guidelines, which are to be reviewed annually.

Structure of the Hungarian Banking System

The Credit Institutions Act provides for three types of credit institutions:

	•		banks (credit institutions that may provide the full range of financial services);

	•		specialized credit institutions (credit institutions that provide special activities, for example, mortgage banks or the Hungarian Development Bank Ltd. (the “MFB”)); and

	•		co-operative credit institutions (credit co-operatives and savings co-operatives).

Only credit institutions are entitled to collect deposits from the public and provide money transmission services. In addition, banks are entitled to provide the full range of financial services listed in the Credit Institutions Act, including making loans, issuing guarantees, trading foreign currencies, issuing bank cards and providing depository services. Banks may also engage in, for their own account or for the accounts of customers, trading in government and corporate securities, and derivatives, and may also provide investment services. The total assets of the credit institutions amounted to HUF 25,655.4 billion as of June 30, 2008.

The following table illustrates certain trends in the Hungarian banking system for the periods indicated:

Banking System — Selected Indicators

Banking survey (% change, year on year)

As of July

31,

2003

2004

2005

2006

2007

2008

Domestic credit

21.0

14.1

16.3

18.5

12.8

9.5


	Banking survey (% change, year on year)
											As of July
											31,
	2003		2004		2005		2006		2007		2008
Credits to enterprises		19.8		13.3		14.2		13.7		12.1		9.9
Credits to households		60.6		27.2		26.4		25.5		24.3		17.9
Broad money (M3)		12.0		11.6		14.5		13.8		11.0		11.8

Source: NBH

Specialized credit institutions are limited with respect to the scope of services they may provide and with respect to the types of clients to which they may provide such services. Specialized credit institutions in Hungary include housing savings associations and mortgage banks. There are two special state-owned institutions: the MFB and the Hungarian Eximbank.

Cooperative institutions may only provide limited types of financial services, primarily the taking of deposits and the making of small loans. As of June 30, 2008, Hungarian cooperative institutions held aggregate total assets of HUF 1,549.4 billion.

In addition to the credit institutions discussed above, several other financial entities play an important role in strengthening the Hungarian banking and financial sectors. These entities include:

	•		the National Deposit Insurance Fund, which credit institutions are required to join, insures deposits up to HUF 6 million per depository, but does not cover the deposits of the government or certain other entities;

	•		the Credit Guarantee Corporation, which guarantees loans to small and medium-sized businesses;

	•		the National Savings Cooperatives Institutions Protection Fund, which is a voluntary consortium of cooperative institutions designed to further such institutions’ mutual interests; and

	•		the Hungarian Export Credit Insurance Corporation, which provides insurance for export credits and exchange rate risks.

Ownership Structure of the Banking Sector

Following the dynamic growth of foreign share ownership in the banking sector in the second half of the 1990s, the proportion of registered capital held by foreign investors stabilized in 2002. In 2005, approximately 80% of the total equity capital of the Hungarian banking sector (excluding the MFB and the Hungarian Eximbank which were owned by the Hungarian state) was held by non-residents.

The only banks (other than the NBH) in which the Republic now holds controlling interests are the MFB (Hungarian Development Bank) and the Hungarian Eximbank. The Republic has also retained a golden share in OTP Bank (the “OTP”), which grants the Republic certain special shareholder rights. For example, there can be no shareholder quorum without the presence of the Republic as holder of the golden share and decisions regarding changes in the registered capital of the bank, the merger, dissolution, transformation or liquidation of the bank, the transfer or encumbrance of rights necessary for the operation of the bank and the appointment or removal of directors and supervisory directors of the bank, who represent the Republic as holder of the golden share, can only be made with the consent of the Republic as holder of the golden share. In compliance with the EU Directive on the freedom of the capital markets, this form of the state’s special ownership rights has been abolished, and the golden share in OTP has been transformed into a common share.

Capital Markets

During the course of its transition to a market economy, Hungary attached great importance to the development of a sound capital market in order to promote economic development and to finance Hungarian enterprises. The Capital Markets Act regulates the offering and trading of securities (including government securities) and the institutional framework of the Hungarian capital market (including stock exchanges, investment funds and clearing houses). State control and supervision of the capital markets was delegated to the Hungarian Financial Supervisory Authority. In line with the trend in other international markets generally,

Hungary has moved towards a universal financial system when regulating the relationship between investment and banking services. Banks with proper authorization may carry on investment and financial services activities within the same organizational frameworks, thereby offering universal banking services. At the end of 2007, regulation of the capital markets in Hungary was substantially in compliance with applicable EU regulations and guidelines.

Stock Exchange

The Budapest Stock Exchange (the “BSE”) opened in 1990, and is a self-governing and self-regulating organization which selects its own governing bodies and officials, adopts its own regulations, defines its operating rules and fixes the fees charged for its services.

In February 2004, the BSE and the Budapest Commodity Exchange (the “BCE”) agreed to integrate their respective activities. The integration was completed in November 2005, and all exchange products formerly traded on the BCE and all members of the BCE have been transferred to the BSE.

In May 2004, a majority stake in the BSE was acquired by a financial consortium led by HVB Bank Hungary. This consortium had the following composition as of August 31, 2008: (i) UniCredit Bank Hungary Zrt., 25.2%; (ii) Wiener Börse, 12.5%; (iii) Raiffeisen Zentralbank, 6.4%; (iv) Österreichische Kontrollbank, 12.5%; and (v) Erste Bank der Österreichischen Sparkassen, 6.4%. The acquisition of a majority stake in the BSE by the consortium has generally been viewed as a positive step towards greater cooperation between the BSE and the other stock exchanges in the Central European region.

The following table sets forth selected indicators relating to the BSE at the end of and for the periods indicated:


	December 31,
	2003		2004		2005⁽¹⁾		2006⁽²⁾		2007⁽¹⁾
Total spot turnover values (in USD millions)		10,313		14,545		25,614		32,734		26,005
Equities		8,595		12,880		24,128		30,880		25,290
Government Bonds		695		525		401		617		163
Corporate Bonds		316		509		613		681		284
Bonds of International Institutions		1		—		—		—		—
Mortgage Bonds		474		430		376		369		170
T-Bills		208		193		86		158		42
Investment Funds		4		4		7		23		55
Compensation Notes		20		4		1		6		0
Total number of transactions		718,377		790,916		1,119,909		1,483,551		1,654,992
Equities		702,701		775,144		1,104,246		1,464,913		1,629,373
Government Bonds		1,131		638		281		391		233
Corporate Bonds		2,690		8,486		11,129		11,501		14,942
Bonds of International Institutions		13		—		—		—		—
Mortgage Bonds		1,036		1,929		2,034		2,680		2,089
T-Bills		435		185		96		103		52
Investment Funds		1,348		1,165		1,253		2,186		7,177
Compensation Notes		9,023		3,369		870		1,777		1,126
Average number of daily transactions		2,851		3,164		4,427		5,887		6,755
Average daily turnover (in USD millions)		41		58		101		130		106
Average value per transaction (in USD thousands)		14		18		23		22		16
Number of trading days		252		250		253		252		245
Total Futures Turnover (in USD millions)		6,530		10,894		23,695		30,659		19,367
Budapest Stock Exchange Index “BUX”		1,480		2,167		5,218		7,253		3,060
Currencies		1,870		3,932		10,643		14,416		9,499
Shares		3,180		4,791		7,831		8,977		6,804
Interest Rates		—		4		3		12		3
Number of transactions		157,868		176,073		283,301		426,896		435,519
Total Options Turnover (in USD millions)		812		64		257		1,330		379

					��
	December 31,
	2003		2004		2005⁽¹⁾		2006⁽²⁾		2007⁽¹⁾
Equity options		812		4		6		5		0
Index options		—		—		—		13		1
Currency options		—		60		251		1,312		378
Number of trades (thousand)		12		49		270		1,079		1,109
Average exchange rate HUF/USD⁽³⁾		215.2		202.6		199.7		210.5		183.8

Source: Budapest Stock Exchange

Notes:

	(1)		USD values calculated based on EUR values of the Budapest Stock Exchange and the yearly average EUR/HUF and USD/HUF foreign exchange rates calculated by the NBH.

	(2)		USD values calculated based on HUF values of the Budapest Stock Exchange and the yearly average USD/HUF foreign exchange rates calculated by the NBH.

	(3)		Exchange rate used by the Budapest Stock Exchange for calculating USD values expressed in this table.

PUBLIC FINANCE

General Information

The public finance sector in Hungary consists of the central government budget, social security funds (pension and health funds), extra-budgetary funds and local government budgets, which together are referred to as the general government budget.

Methodology

The fiscal year for the government is the calendar year. The general government budget data are compiled by the Ministry of Finance in several stages. In the fall of each calendar year, the Ministry of Finance compiles the first preliminary budget (called the “planned budget”) for the following calendar year in accordance with the budget act approved by Parliament for such year.

In January of each given calendar year, the Ministry of Finance compiles the first version of the general government budget for the previous year. This budget (compiled according to data available in January) is called the “preliminary budget.” During the course of the year, the Ministry of Finance collects additional information concerning the revenues and expenditures related to the previous year. In light of this additional information, the Ministry of Finance revises the preliminary budget (compiled in January) and compiles the second version of the general government budget for the previous year. This budget (compiled according to data available in May of a given calendar year) is called the “fact budget.” The main reason for the differences between the preliminary and fact budgets is the uncertainty of the exact amounts of revenues and expenditures of the central governmental institutions, as balance sheets of these institutions are not compiled until May of a given calendar year. The Ministry of Finance is obliged to compile the final account by the end of August of a given calendar year using the fact budget. The final account is submitted to the Parliament, and the Parliament approves the final account with a simple majority vote. However, the final account submitted to Parliament may differ from the final account approved by Parliament due to amendments. After the final account is approved by Parliament, the Ministry of Finance compiles the third version of the general government budget for the previous year, known as the “final budget.”

The information included in this document with respect to the budget for 2007 was derived from the fact budget for 2007 as calculated by the Ministry of Finance using data available in May 2008.

Budget Trends

The following table sets forth the main fiscal trends in Hungary for the years indicated:

Budget Trends⁽¹⁾


	General government balance, consolidated
	2003			2004			2005			2006			2007
	Final			Final			Final			Final			Preliminary
							(HUF billions)
GFS method
Revenues		7,620.0			8,208.0			9,518.3			10,484.4			11,637.5
Privatization receipts		9.0			10.9			16.1			17.3			24.0
Revenues (excluding privatization receipts)		7,611.0			8,197.1			9,502.2			10,467.1			11,613.5
Expenditures		8,714.5			9,525.0			10,569.8			12,666.1			12,974.3
Balance (excluding privatization receipts)		(1,103.5	)		(1,327.9	)		(1,067.6	)		(2,199.0	)		(1,363.0	)
Balance in % of GDP		(5.8	)		(6.4	)		(4.8	)		(9.2	)		(5.4	) ⁽²⁾
General government balance, consolidated		—			—			—			—			—
ESA method
Revenues		7,941.6			8,795.9			9,300.5			10,128.8			11,322.0
Expenditures		9,306.5			10,133.7			11,019.8			12,316.9			12,717.0
Balance		(1,365.0	)		(1,337.8	)		(1,719.2	)		(2,188.2	)		(1,395.0	)
Balance in % of GDP		(7.2	)		(6.5	)		(7.8	)		(9.2	)		(5.5	) ⁽²⁾


Source: CSO and Ministry of Finance


Notes:

(1)		For methodological remarks on planned, expected, preliminary and fact budgets, see “Public Finance — General Information — Methodology.”

(2)		With projected GDP.

According to fact data available in May 2008, the general government deficit (including local governments) amounted to HUF 1,363.0 billion (5.4% of GDP) according to GFS methodology for the year 2007. The general government deficit for the year 2007 according to ESA methodology (local governments included) reached HUF 1,395.0 billion, equaling 5.5% of the GDP for the year 2007.

On December 5, 2006, the Parliament approved the general government budget deficit for the year 2007. The general government deficit (excluding local governments) according to GFS methodology was planned to reach HUF 1,684.0 billion equaling 6.9% of projected GDP for the year 2007. The general government deficit (excluding local governments) according to ESA methodology was planned to reach 6.8% of projected GDP for the year 2007. Subsequently, on December 21, 2006, the Parliament approved the budget for the year 2007.

On November 5, 2007, Fitch Ratings changed its foreign currency and local currency sovereign credit ratings outlook of the Republic of Hungary from “negative” to “stable”. The current ratings were affirmed.

On November 30, 2007, the Ministry of Finance published the latest version of the Convergence Report. The Government revised downwards the expected general government deficit (including local governments) for the year 2007 according to the ESA methodology from 6.4% of the expected GDP to 6.2%, and the expected general government deficit (including local governments) for the year 2008 according to ESA methodology from 4.1% of the expected GDP to 4.0%.

On January 8, 2008, the Ministry of Finance published the preliminary general government deficit (excluding local governments) for the year 2007 according to the GFS methodology. The deficit reached HUF 1,291.4 billion, or 5.0%, of the projected GDP for the year 2007.

On January 17, 2008, the Ministry of Finance published the preliminary general government deficit (including local governments) for the year 2007 according to the ESA methodology. According to the first estimate of the Ministry of Finance, the deficit reached 5.7% of the projected GDP for the year 2007.

On March 9, 2008, a referendum was held on daily hospital and doctor visit fees and higher education tuition fees. The majority of votes demanded the abolition of these measures.

On March 14, 2008, Standard & Poor’s changed the long term foreign currency and local currency debt outlook from “Stable” to “Negative”, the rating remained “BBB+”.

On April 1, 2008, the Central Statistical Office published the preliminary general government deficit (including local governments) for the year 2007 according to the ESA methodology. The deficit reached HUF 1,395.1 billion, or 5.5%, of GDP for the year 2007.

On May 5, 2008, Mr. Ferenc Gyurcsány formed a new minority government after the former minority coalition partner AFD decided to leave the previous coalition government.

On October 15, 2008, Standard & Poor’s put the sovereign credit rating of Hungary on negative watch list.

On October 17, 2008, Fitch Ratings changed its foreign currency and local currency sovereign credit ratings outlook of the Republic of Hungary from “stable” to “negative.”

On October 29, 2008, the International Monetary Fund, the European Union and the World Bank agreed with the Republic to grant a financial assistance package of up to $25.1 billion. The IMF will provide a 17-month standby facility of $15.7 billion (EUR 12.5 billion), while the European Union is ready to lend Hungary $8.1 billion (EUR 6.5 billion), and there is a possibility to draw down $1.3 billion (EUR 1 billion) from the World Bank to assist the Republic in addressing the consequences of the global financial crisis.

On November 7, 2008, Moody’s Investors Service lowered the local and foreign currency government bond ratings and the country ceiling for foreign currency bank deposits of the Republic of Hungary to A3 from A2. All new ratings carry a negative outlook.

On November 10, 2008, Fitch Ratings changed its foreign currency and local currency sovereign credit ratings to BBB and BBB+ respectively. The outlook of the ratings is stable.

Central Government Budget

The following table sets forth information concerning central government revenues and expenditures for the years 2003 to 2005, the final budget for 2006 and the fact budget for 2007:

Central Government Revenues and Expenditures⁽¹⁾


	Revenues and expenditures of the central budget
	2003		2004		2005		2006		2007		2007		2008
	Final		Final		Final		Final		Planned		Preliminary		Planned
							(HUF billions)
Revenues
Payments of Economic Units
Corporate taxes (including financial institutions)		413.7		448.7		465.6		555.0		679.0		700.3		716.3
DPTT⁽²⁾		17.8		19.7		23.8		33.6		30.0		31.5		29.0
Customs and import duties		131.3		39.3		9.4		9.1		9.2		9.2		8.9
Gambling tax		49.2		60.4		66.4		71.5		73.4		71.5		73.5
Eco tax		—		17.4		15.9		18.1		17.0		19.9		20.5
Simplified business tax		31.0		67.0		91.4		143.1		168.2		152.8		168.7
Other central payments		78.2		126.4		165.1		140.4		135.2		124.1		130.7
Other payments		22.1		23.6		21.2		35.2		29.0		19.3		31.0

Total		743.2		802.6		846.2		1,005.9		1,141.0		1,119.2		1,169.6


Taxes on Consumption
Value Added Tax		1,699.6		1,727.7		1,785.3		1,832.0		1,971.2		1,979.4		2,130.6
Excises		656.3		716.2		739.0		849.2		821.4		912.0		937.6

Total		2,355.9		2,443.9		2,524.3		2,681.2		2,792.6		2,891.4		3,068.2


Payments of Households
Gross PIT revenues		1,314.4		1,360.4		1,437.7		1,579.8		1,751.6		n/a		1,938.3
PIT revenues of central budget		909.0		904.6		997.8		1,119.1		1,238.3		1,305.7		1,367.2
Tax payments		7.0		5.8		3.4		7.3		22.3		26.5		32.2
Fees		90.2		100.1		111.8		111.1		126.8		118.8		131.4

Total		1,006.2		1,010.5		1,113.0		1,237.4		1,387.4		1,451.0		2,101.8


Central Budgetary Institutions and Chapter Administered Appropriations
Revenue of the central budgetary institutions		545.2		612.4		688.7		832.5		562.5		830.3		536.8
Own revenues of chapter administered professional appropriations		56.7		86.4		124.8		133.1		57.6		156.8		69.7
EU support of chapter administered professional appropriations		—		49.1		195.3		302.2		464.5		281.8		601.1
EU support of central investments		3.6		0.5		8.0		—		—		—		—

Total		605.5		748.5		1,009.5		1,267.8		1,084.6		1,268.9		1,207.5

Payments of Central Budgetary Institutions		34.9		35.7		57.9		110.5		22.7		49.5		21.5
Payments of Local Governments		7.1		10.4		15.3		15.6		6.5		11.3		6.5


	Revenues and expenditures of the central budget
	2003		2004		2005		2006		2007		2007		2008
	Final		Final		Final		Final		Planned		Preliminary		Planned
							(HUF billions)
Payments of Extrabudgetary and Social Security Funds		49.4		67.9		81.3		82.0		113.3		135.9		119.3
Revenues of International Transactions		28.5		16.0		6.4		8.6		—		—		—
Payments Related to State Property		23.9		68.2		632.0		33.0		48.2		48.8		96.4
Road Tolls		—		—		—		—		—		—		—
Motorways		—		—		—		—		—		—		—
Other Revenues		7.8		10.9		39.9		20.7		4.7		20.3		6.2
Revenues Related to Debt Service		1.8		1.8		116.4		1.0		0.2		96.4		61.5
Lump Sum Cash Flow Facility from EU		—		42.8		17.8		7.8		11.4		n/a		32.0
Payments of NBH		—		—		—		—		—		—		—
Interest Revenues		73.9		74.0		108.6		77.6		66.4		n/a		n/a

Total Revenues		4,938.2		5,333.1		6,456.7		6,549.2		6,679.0		7,102.0		7,899.5


	Revenues and expenditures of the central budget
	2003		2004		2005		2006		2007		2007		��	2008
	Final		Final		Final		Final		Planned		Preliminary			Planned
							(HUF billions)
Expenditures
Subsidies to Economic Units		110.2		122.7		113.1		124.0		128.4		197.4			141.8
Support to the Media		48.4		43.2		45.9		46.6		52.2		52.2			53.4
from which Support to the Broadcasting Fund		20.4		—		—		—		—		—			—
Consumer Price Subsidy		104.9		103.8		117.7		117.9		120.0		111.9			117.0
Housing Grants		137.2		204.0		232.6		223.5		225.4		228.5			190.7

Family Benefits Social Subsidies
Family benefits		314.8		307.8		326.3		471.0		506.3		508.1			507.2
Income supplement benefits		123.0		133.7		141.1		147.6		152.5		151.7			159.7
Other specific subsidies		24.0		23.3		25.7		27.4		27.5		26.5			27.6

Total		461.8		464.8		493.1		646.0		686.3		686.3			694.5


Central Budgetary Institutions and Chapter Administered Appropriations
Expenditures of central budgetary institutions		1,847.3		1,927.5		2,038.5		2,280.1		1,817.6		2,379.4			1,861.2
Chapter administered professional appropriations		956.9		1,099.5		1,248.6		1,565.4		1,853.5		1,811.4			1,926.6
Central investment		87.9		63.9		49.0		51.1		22.7		37.3			—
Chapter balance reserve		—		80.4		—		88.8		—		—			—

Total		2,892.1		3,090.9		3,336.1		3,896.5		3,774.1		4,228.1			3,876.5

Support to Political Parties and Other Civil Organizations		2.7		3.7		3.7		5.1		5.2		5.2			5.2
Transfer to Social Security Funds		301.9		335.9		422.4		890.6		778.0		777.8			841.3

Transfer to Local Governments
Direct transfer from the budget		749.4		769.0		881.4		867.1		835.7		860.3			777.6
Transfer from EU		—		—		17.4		24.2		140.7		n/a			190.0
Yielded PIT revenues		405.4		455.8		439.9		460.7		513.2		n/a			571.1


	Revenues and expenditures of the central budget
	2003		2004		2005		2006		2007		2007		2008
	Final		Final		Final		Final		Planned		Preliminary		Planned
							(HUF billions)
Total		1,154.9		1,224.7		1,321.3		1,352.1		1,349.0		1,354.6		1,348.6

Transfer to Extrabudgetary Funds		2.6		15.9		20.4		19.2		27.9		27.9		32.4
Expenditures of International Transactions		1.5		7.7		7.6		8.0		16.0		14.6		14.2
Debt Service Related Expenditures		9.8		10.8		11.1		13.2		12.6		—		—
Other Expenditures		19.3		20.2		34.3		53.2		41.7		58.2		46.3
General Reserves		—		—		—		—		42.2		—		46.7
Special Reserves		—		—		—		—		52.7		—		163.6
Safety Reserve		—		—		—		—		50.0		—		20.0
Extraordinary Expenditures		14.3		47.1		181.2		433.4		146.1		37.5		89.4
Transfer to NBH		—		—		—		—		—		—		—
Government Guarantees Redeemed		12.4		2.7		13.9		10.8		16.4		10.3		19.3
Contribution To EU Budget		—		119.7		186.6		185.6		214.9		189.5		205.3
Expenditures Related to the NBH		—		—		—		—		—		—		—
Interest Payments		802.3		875.5		903.3		970.0		1,100.0		1,006.1		1,110.8

Total Expenditures		5,670.6		6,237.6		7,004.5		8,510.8		8,351.3		8,491.9		9,017.1


Source: Ministry of Finance

Notes:

(1)		For methodological remarks on planned, expected, preliminary, fact, and final budgets see “Public Finance — General Information — Methodology.”

(2)		Mine rents.

Central Government Budget Process

The Ministry of Finance prepares the central government budget on a calendar year basis for the government, which submits it to Parliament for consideration and ultimate approval. The annual central government budget for each coming year is supposed to be approved prior to the beginning of the relevant year. If Parliament does not approve the budget by such time, the government is obliged to propose a bill on an interim central government budget without delay. If the bill on the interim central government budget is not approved by Parliament either, the government is entitled to collect revenues due to the central government budget in accordance with the laws then in force and to make expenditures in line with the central government budget for the preceding calendar year.

Within eight months following the end of each calendar year, the final accounts for the preceding year are compiled by the government and are submitted to Parliament for final approval.

The major components of revenue under the central government budget comprise taxes imposed on consumption (including VAT), enterprise taxes and taxes on households (primarily personal income taxes). The major expenditure items of the central government budget comprise debt service and transfers to the social security funds, budgetary institutions, local governments and extra-budgetary funds.

Roles of the Ministry of Finance, the Hungarian State Treasury and the Government Debt Management Agency

The Ministry of Finance is responsible for supplying information to support decision-making of the government and for coordinating issues falling within the government’s scope of authority in relation to public finances. Specific responsibilities include the preparation of the bill on the final accounts of the central government and the central government budget, which is presented to Parliament each calendar year.

The Ministry of Finance is required to ensure the execution of the central budget, the solvency of the central government, the financing of the central government and the registration of government debt guarantees, including loans granted and claims of the central government. These tasks are executed through

the Treasury and debt and liquidity management tasks are carried out by Államadósság Kezelö Központ Zártkörüen Müködö Részvénytársaság, a special government debt management agency (the “Government Debt Management Agency Private Company Limited by Shares” or “GDMA Pte Ltd.”).

The Treasury was established on January 1, 1996 as a central budgetary organization. The legal and professional supervision of the Treasury is performed by the Ministry of Finance. Within its budget execution responsibilities, the Treasury’s main task is the management of budget appropriations and government cash flows and the determination of the daily financing needs of the central government. The management of budget appropriations includes the registration of annual appropriations, the monitoring of their changes and the right to authorize payments from appropriated amounts.

The cash management duties of the Treasury include account management for the budgetary institutions, which, in accordance with the Act on Public Finances, are obliged to keep their accounts with the Treasury. The Treasury administers the Single Treasury Account, which is the cash account of the Treasury held at the NBH.

The Treasury’s responsibilities also include the provision of funds for public investments, the transfer of contributions and subsidies to municipalities, and the management and collection of loans and other claims of the central government.

The government’s borrowing needs are financed by the Government Debt Management Agency Private Company Limited by Shares. The Finance Minister established the Government Debt Management Agency Private Company Limited by Shares in order to concentrate debt management functions into one organization. Accordingly, the Government Debt Management Agency Private Company Limited by Shares manages, renews and records the forint and foreign exchange debt of the central government and, pursuant to the amendment of the Public Financing Act of 2003, manages the liquidity of the Single Treasury Account. In the context of liquidity management, the Government Debt Management Agency Private Company Limited by Shares introduced new secondary market operations (such as repurchase transactions on the domestic securities market).

In the domestic market, the responsibilities of the Government Debt Management Agency Private Company Limited by Shares include the administration of auctions and subscriptions, and the development of the institutional framework and the structure of government securities markets. Further, the Government Debt Management Agency Private Company Limited by Shares provides easily accessible, up-to-date information on the government securities markets and on the financing of the Republic’s borrowing needs in order to encourage transparency and openness. With respect to foreign debt management, the Government Debt Management Agency Private Company Limited by Shares acts in the name of the Republic of Hungary in raising funds, manages the foreign exchange debt of the central government, ensures promptness and accuracy in respect of debt service payments and effects hedging transactions to reduce risks.

Taxation

The current Hungarian taxation system was introduced in 1988. The most important elements of the Hungarian tax system are corporate profit tax, personal income tax, value added tax, excise duty and local taxes.

Hungarian tax law distinguishes between domestic and foreign taxpayers. The tax liability of a domestic taxpayer extends to income originating from both Hungary and abroad, while the tax liability of a non-Hungarian taxpayer is restricted to its Hungarian source of income as defined by the respective Hungarian tax law and is also generally affected by the applicable double taxation treaty. Hungary has entered into a double taxation treaty with more than 60 countries, including almost all of the OECD countries. Of the OECD countries, Hungary does not have a double taxation treaty with New Zealand and Mexico.

Hungary, like many developing countries, has a substantial “shadow” economy, which is able to avoid paying taxes. Recent improvements to this situation are demonstrated by increases in tax receipts that have outpaced GDP growth. Further improvement is expected as larger companies and multinational enterprises assume a greater role in the Hungarian economy.

The Hungarian tax system has undergone moderate changes in recent years in an effort to improve competitiveness and to harmonize the Hungarian tax system with EU standards. Most recently, personal

income tax was reduced, and the highest rate of VAT was reduced to 20% from 25% (each with effect as of January 1, 2006).

Corporate Profit Tax and Corporate Dividend Tax

The corporate tax rate on profits is generally 16%, although taxpayers may take advantage of certain tax preferences. Domestic entities receiving dividends are exempted from Hungarian dividend tax. A foreign entity receiving dividend, interest and royalties from a local source is not subject to withholding tax.

Personal Income Tax

Hungary has a two-tier graduated personal income tax rate structure with rates of 18% and 36%.

Value Added Tax

Effective as of January 1, 2006, the standard VAT rate was decreased from 25% to 20%. A reduced VAT rate of 5% applies to certain items considered to be of social importance (such as medicine and books). The current Hungarian VAT system is fully harmonized with all relevant applicable EU Directives.

Registration Tax

Registration tax has been levied on the registration of cars since February 2004; however, in line with a recent decision of the European Parliament, this tax will be abolished gradually within 10 years.

Excise Duty

An excise duty is levied on the manufacturing, importing, warehousing, storage and distribution of mineral oils, alcoholic products, beer, wine, champagne, intermediary alcohol products and tobacco products.

Luxury Tax

As from January 1, 2006, the government introduced a tax imposed on the purchase of expensive residential buildings with a value in excess of HUF 100 million.

Solidarity Surtax

This surtax being 4% has been payable by entities which are subject to corporate tax and natural persons above a certain income as of September 1, 2006.

Other Central Government Revenues

Customs duties are imposed on goods imported from outside the European Union in accordance with the European Union customs code. The central government levies duties on the acquisition of real estate, cars and certain other products and also on certain administrative procedures.

Local Taxes

Local taxes vary between municipalities. Local governments are permitted to assess local business tax and various property taxes.

Social Security and Extra-Budgetary Funds

The social security funds consist of two funds: the pension fund and the health fund. The following table sets forth the revenues and expenditures for social security and certain extra-budgetary funds:

Social Security and Extra-Budgetary Funds, Revenues and Expenditures⁽¹⁾


	December 31,
										2006			2007			2007		2008
	2003			2004			2005			Final			Planned			Preliminary		Planned
										(HUF billions)
Social Securities Fund
Revenues		2,526.5			2,726.9			3,027.1			3,661.0			4,202.4			4,326.7		4,310.2
Expenditures		2,875.5			3,150.8			3,495.9			3,791.8			4,229.9			4,291.2		4,308.2
Surplus (deficit)		(349.0	)		(423.9	)		(468.8	)		(130.8	)		(27.5	)		35.6		2.0
Extra Budgetary Funds⁽²⁾ Revenues		244.6			304.7			341.6			391.9			428.6			459.9		481.7
Expenditures		226.0			276.8			311.2			342.0			412.7			396.9		476.8
Surplus (deficit)		18.5			27.9			30.4			49.9			16.0			63.0		4.9


Source: Ministry of Finance

Notes:

(1)		For methodological remarks on planned, expected, preliminary, fact, and final budgets, see “Public Finance — General Information — Methodology.”

(2)		Currently, these funds consist of the Central Nuclear Fund, the Labor Market Fund, the Research and Technology Innovation Fund, the National Cultural Fund, the Homeland Fund and the Wesselényi Miklós’ Flood and Inland Waters Compensation Fund.

The contribution of the central government to the social security funds was HUF 220.5 billion in 2001, HUF 383.9 billion in 2002, HUF 301.9 billion in 2003, and HUF 335.9 billion in 2004, and is expected to total HUF 421.4 billion in 2005, HUF 890.5 billion in 2006 and amounted to HUF 777.8 billion in 2007 according to fact data.

Social Security System

Before the fall of communism in 1989, social security in Hungary was based on the principle of solidarity and risk sharing. The provision of social, health and pension benefits through collection and reallocation was carried out by the Hungarian state. Since the change of the political and economic system, self-provision has been playing an increasingly important role in Hungary’s social security system. Currently, Hungarian citizens may influence their respective future social benefit through the amounts paid to an individual account. In any event, the Hungarian state provides social security benefits for those incapable of self-provision.

Health Care System

Health services are provided to help people stay healthy and to help those who have fallen ill to recover within the shortest possible period of time or, if this is not possible, to maintain the highest possible quality of life for as long as possible. Health care provision is governed by the principle of gradual approach, where a patient is to be treated and where the requirements are adequately met by the available resources, and should be referred to a higher level only if his or her treatment can be carried out in a more efficient way. The first level is the basic health care provided by the family doctor, the second level consists of specialized consulting services in out-patient care, and the third level is represented by in-patient care institutions (hospitals, clinics and sanatoria). All beneficiaries have the right to sufficient information on their respective illness and to the necessary treatment. However, for ongoing and regular health care, a patient has to duly pay his or her respective social security contributions and has to hold a social security card as proof of this. On this basis, a citizen is entitled to use the ambulant services, to receive sickness benefit or to qualify for disability pension when his or her respective working capability is permanently reduced. In addition to the disability benefits provided to people disabled by ill health or accident, disabled people are entitled to additional financial and in-kind benefits, including for instance the right to use designated parking lots and receive financial assistance for travel.

Several changes were introduced into the health insurance system in recent years. The contribution of households to the financing of health services has been increased. A free or heavily subsidized health service is available in some cases only for those who are most in need. The number of days of sick payment paid by

employers has generally decreased in recent years, but the contribution of the employer to the amount paid to the patient has increased. Employers pay 5% of an employee’s income and the employee contributes 56%. In addition, there is currently a fixed monthly health care contribution by employers of HUF 1,950 per employee per month.

Pension System

In the course of the reform of the social security system, the pension system has undergone the most fundamental transformation over the last decade. The single-tier pension system has been replaced by a three- tier system, pursuant to which in addition to the pension contribution deducted from wages on a mandatory basis, private pension funds offer the possibility of self-provision. Furthermore, an employee has the possibility of joining a voluntary pension fund as well. The current “three-pillar” pension system was instituted in 1998. The three pillars of this system are: state pensions (the “pay-as-you-go” system), voluntary pension funds and private pension funds.

Mandatory payments are made to the state pension fund and to a private pension fund selected by the employee. The mandatory pension contribution equals 33.5% of the employee’s monthly salary, out of which 9.5% is paid by the employee and 24% by the employer. The contribution paid by the employer goes to the state pension fund in each case. If the employee opts to join a private pension scheme, then, of the employee’s 9.5% contribution, 8% is transferred to the private pension fund and the remaining 1.5% is transferred to the state fund. However, entrants are obliged to choose a private pension system. For employees remaining solely in the state system, the entire 9.5% contribution goes to the state pension fund. Membership of voluntary or mutual pension schemes, however, is not obligatory. Retirement age was raised from 55 years for women and 60 years for men to 62 years for both women and men. However, the positive efforts of the pension reform on the general budget will not be apparent for at least 30 years, due to the delayed effect.

Sustainability of the social security system

Health Care System. Since 2002, the in-kind benefits of the health insurance system have generally increased faster than GDP. This was the result of the rapid dissemination of innovative drugs, wage adjustments for employees in health care and the fast increase of service provision. Because of the strict budgetary requirements in 2004, numerous short-term measures were adopted (including the freezing of medicine prices, digressive financing techniques and the introduction of cost-volume agreements) in order to help control the expenditures relating to the health care system.

In order to ease the burden of the state in the long term in the financing of the health care system, the government has started preparations for a financing reform of the health care system. The reform is expected to aim at curbing the expenditure growth, and introducing cost-effective services by changing the financing and incentive mechanisms.

Pension System. According to demographic projections, the proportion of the population over retirement age compared to the population of working age will increase significantly in the next decades. The increase in the retirement age (see “- Social Security and Extra-Budgetary Funds - Social Security System — Pension System”) and the increase in the employment rate may result in a temporary improvement, but will not be sufficient to overturn the long-term trend.

In response to these adverse demographic trends, the government has taken certain steps to reform the pension system. Most importantly, these steps include (in addition to raising the retirement age) the introduction of mixed financing and the application of the so-called Swiss indexation (50% of wage increases, and 50% of inflation).

Local Government Finance

The following table sets forth the revenues and expenditures at the local government level for the years indicated for all the local governments:

Local Government Revenues and Expenditures


													2007			2007			2008			2008
	2003			2004			2005			2006			Planned			Preliminary			Planned			Expected
										(HUF billions)
Revenues
Own revenues		1,096.8			1,250.0			1,284.2			1,366.5			1,432.2			1,430.4			1,614.7			1,614.7
Subsidiaries		749.4			769.0			881.4			867.1			835.7			884.8			777.6			826.4
Other revenues		646.5			643.6			709.3			804.3			816.2			708.3			884.5			884.5

Total GFS - revenues⁽¹⁾		2,492.7			2,662.6			2,874.9			3,037.9			3,084.1			3,023.5			3,276.8			3,325.6

Privatization revenues		9.0			10.9			16.1			15.5			12.0			23.0			10.0			10.0

Total revenues		2,501.7			2,673.5			2,891.0			3,053.4			3,096.1			3,046.5			3,286.8			3,335.6

Expenditures
Wages		1,270.8			1,310.1			1,412.8			1,464.9			1,465.1			1,472.7			1,480.7			1,480.7
Investments		427.1			448.7			562.4			682.1			604.6			575.5			752.4			801.2
Other expenditures		835.5			931.2			997.2			1,062.9			1,110.4			1,058.1			1,164.7			1,164.7
Total⁽¹⁾ GFS-expenditures		2,533.4			2,690.0			2,972.4			3,209.9			3,180.1			3,106.3			3,397.8			3,446.6
Surplus (deficit) - GFS⁽¹⁾		(40.7	)		(27.4	)		(97.5	)		(172.0	)		(96.0	)		(82.8	)		(121.0	)		(121.0	)

Total surplus (deficit)		(31.7	)		(16.5	)		(81.4	)		(156.5	)		(84.0	)		(59.8	)		(111.0	)		(111.0	)


Source: Ministry of Finance

Note:

(1)		Excluding privatization revenues.

The municipalities are to a large extent autonomous according to the Constitution and the Local Government Act. However, the government must take the local government deficit into account when preparing and implementing the central government budget and other parts of the public budget, over which the government and Parliament have a more direct control. Parliament can, nevertheless, influence the financial situation of local governments through the volume of budget grants (transfers) and the tax-sharing system.

According to fact data available as of the date of this report, for 2007, the revenues of the local governments amounted to HUF 3,023.5 billion, the expenditures amounted to HUF 3,106.3 billion, and thus the fiscal deficit of the local governments amounted to HUF 82.8 billion for 2007.

EU Net Position

The following table sets forth certain information with respect to the budgetary relations between the Republic and the EU:

Budgeted financial flows between Hungary and the EU budget between 2004 and 2007


	2004⁽¹⁾		2005⁽²⁾		2006⁽³⁾		2007⁽⁴⁾
			(HUF millions, current prices)
EU resources appearing in the Hungarian budget⁽⁵⁾		91,942.2		203,749.6		310,076.2		287,396.2
National contribution (co-financing of projects)⁽⁶⁾		34,897.5		89,393.1		168,189.7		171,615.3
EU resources out of the Hungarian budget (mainly agricultural subsidies)⁽⁷⁾		21,578.8		209,143.0		133,200.0		201,266.5
National contribution to the EU Budget⁽⁸⁾		119,721.4		186,644.5		185,611.9		189,520.0


Source: Ministry of Finance


Notes:

(1)		Final data based on Act CXVIII of 2005 On the Implementation of the Budget of 2004 of the Republic of Hungary.

(2)		Final data based on Act XCIX of 2006 On the Implementation of the Budget of 2005 of the Republic of Hungary.

(3)		Final data based on Act CXXVIII of 2007 On the Implementation of the Budget of 2006 of the Republic of Hungary.

(4)		Data based on Bill T/6133 of 2008 On the Implementation of the Budget of 2007 of the Republic of Hungary.

(5)		Represents the aggregate contribution to the government budget from EU sources.

(6)		Represents the budgeted contribution of the Republic towards projects co-financed with EU funds. Certain EU funds are available only on the condition that the Republic contributes a certain amount to the projects for which such funds are to be provided by the EU.

(7)		Represents payments from the EU Budget towards Hungarian private entities; these payments are received by Hungarian persons and companies, and do not appear in the general government budget of Hungary.

(8)		Represents payments from the Hungarian budget towards the EU budget.

Certain EU funds are only available for certain projects if the Republic contributes a certain percentage amount towards such project. In addition, EU funds which are not used for their designated purpose in a given year are lost and cannot be carried over to a subsequent year.

The EU Commission has criticized Hungary’s high budget deficits several times in recent years, following the Republic’s failure to reach targets that it set itself to reduce its budget deficit. In December 2004, the European Commission stated that Hungary was the only country among the ten new member states not to take effective action to curb its large budget deficit. Subsequently, the European Commission initiated a so-called “excessive deficit procedure” against Hungary for failing to achieve these targets. Since Hungary is not yet a member of the Euro Area, the last two steps of the excessive deficit procedure do not apply, which potentially would oblige Hungary to make penalty payments to the EU budget. However, the non-compliance with the recommendations could end in the freezing of some EU subsidies, although there is no precedent for such penalties being levied by the EU in the past.

Medium-Term Fiscal Program and the Convergence Programme

Under EU legislation, prior to adopting the Euro, Hungary is required to have fulfilled the following convergence criteria (the “Maastricht Criteria”):

	•		price stability — maintain a sustainable price performance and achieve an average rate of inflation (measured over a period of one year before the examination) that does not exceed by more than 1.5% the average rate of inflation of the three member states which perform the best in terms of price stability;

	•		long-term interest rates — achieve an average nominal long-term interest rate (measured over a period of one year before the examination) that does not exceed by more than 2% that of the three best performing Member States in terms of price stability;

	•		the government budgetary position — achieve a ratio of planned or actual government deficit to GDP that does not exceed 3%, unless either (i) the ratio has declined substantially and continuously and reached a level that comes close to the reference value, or, alternatively (ii) the excess of the reference value is only exceptional and temporary and the ratio remains close to the reference value;

	•		government debt — achieve a ratio of government debt to GDP that does not exceed 60%, unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace; and

	•		exchange rate — participate for at least two years in the Exchange Rate Mechanism (“ERM II”) and observe the normal fluctuation margins close to central parity provided for by the mechanism for at least two years.

The convergence required for entering the Euro area is formally assessed annually and the final decision is subsequently made by a summit of EU Member States acting on the recommendation of the ECOFIN Council.

According to the latest Convergence Programme published in November 2007, the Republic indicated that the Maastricht Criteria could be achieved by the year 2010.

The Convergence Programme contemplates a significant reduction of the government deficit in 2008 and the following years. According to the Convergence Programme, the government deficit to GDP ratio shall decrease from 9.2% in 2006 to 6.2% in 2007, 4.0% in 2008, 3.2% in 2009, 2.7% in 2010 and 2.2% in 2011. The Convergence Programme gives a detailed description of the structural measures taken in the areas of central public administration, local government system, public education, higher education, gas and district heating subsidies, disability benefits and public transport that shall reduce the government deficit. According to the government’s estimate, the GDP growth rate will temporarily shrink to 1.7% and 2.8% respectively for the years 2007 and 2008, while the GDP growth rate for 2009 and afterwards will rebound to approximately 4% as experienced in previous years. As a consequence of diminishing government deficit and a temporary shrinking of the GDP dynamics, the gross government debt to GDP ratio shall decrease from 65.6% in 2006 to 65.4% in 2007, and increase to 65.8% in 2008. Afterwards, the rate shall diminish to 64.4% in 2009, 63.3% in 2010 and 61.8% in 2011. The Convergence Programme projects declining current account deficit to GDP ratio in parallel with decreasing government deficit to GDP ratio. According to the government’s estimate, the current account deficit to GDP ratio shall decrease from 6.5% in 2006 to 4.9% in 2007, 4.0% in 2008, 3.3% in 2009, 3.0% in 2010, and 2.8% in 2011.

The following table sets forth the projections of the Convergence Programme concerning the main macroeconomic indicators of Hungary.


	2006			2007			2008		2009		2010		2011
	(%)
Growth Rate
GDP		3.9			1.7			2.8		4.0		4.1		4.2
Domestic Use		1.1			(0.3	)		0.9		2.8		3.1		3.4
of which
Households’ consumption		1.9			(0.4	)		1.2		1.9		2.3		3.1
Investment		(2.8	)		2.0			4.2		7.4		7.0		6.0
Export		18.9			15.5			12.9		11.8		11.5		11.2
Import		14.5			13.2			11.1		11.0		11.1		11.1
Unemployment rate		7.5			7.3			7.3		7.2		7.1		7.1
Consumer price index		3.9			7.9			4.8		3.0		2.9		2.8

In % of GDP
Current account deficit		6.5			4.9			4.0		3.3		3.0		2.8
External financing need		5.7			4.1			2.3		1.7		1.3		0.8
Taxes and social contributions		37.0			39.1			39.0		38.3		37.6		37.2
General government budget revenues		42.6			44.1			44.2		43.3		42.4		42.0
General government budget expenditures		51.8			50.3			48.2		46.5		45.1		44.2
General government deficit according to ESA methodology		9.2			6.2			4.0		3.2		2.7		2.2
Gross government debt according to ESA methodology		65.6			65.4			65.8		64.4		63.3		61.8

Source: Ministry of Finance

NATIONAL DEBT

General Information

Traditionally, the NBH was the primary entity through which Hungary borrowed money in foreign currencies. Pursuant to the 1997 amendment to the National Bank Act, the NBH may now only incur foreign currency debt for its own purposes and all foreign currency borrowings and debt security issuances for the central budget must be made directly by the Republic, acting through the Ministry of Finance. The Finance Minister, in turn, has delegated these debt management functions to the Government Debt Management Agency, which was part of the Treasury until 2001, after which it became a separate legal entity. Following January 1, 1999, foreign currency debt issuances are arranged by the Government Debt Management Agency. See “Public Finance — General Information — Roles of the Ministry of Finance, the Hungarian State Treasury and the Government Debt Management Agency.”

The NBH has remained the legal or named obligor on the outstanding foreign currency debt incurred before January 1, 1999. The majority of the interest rate and exchange rate risks associated with these debts and any related swaps, however, have been effectively transferred to the Republic pursuant to a series of transfer agreements, whereby the Republic has essentially agreed to pay the NBH sufficient funds to cover these obligations. Following this transfer of risk, the Republic entered into a number of swap agreements to match the currency profile of this debt portfolio to that of the currency basket (100% Euro since January 2000) upon which the forint is pegged. The NBH may still act as an agent of the Republic for the purposes of obtaining foreign loans and issuing securities abroad. Since January 1997, the NBH has acted in this agency role on the basis of an agency agreement, which was entered into by the NBH and the Republic, as permitted by the amended National Bank Act.

Because of this history, all references to public debt include debt of the Republic and the NBH. Public debt also includes debt of the social security and other extra-budgetary funds, but does not include local government debt. External public debt refers to public debt that is denominated in a foreign currency and almost always owed to a non-Hungarian party. Internal public debt refers to public debt denominated in forint and typically owed to parties within the country. Gross external debt refers to all of the foreign currency denominated debt owed by Hungarian persons and both public and private entities to non-resident creditors. Loans between the NBH and the Republic relating to external borrowings originally made by the NBH were not added for the purposes of calculating public debt figures, to avoid double counting.

Public Debt

The following table sets out certain statistics regarding Hungarian public debt for the years indicated:


	December 31,⁽¹⁾
	2003			2004			2005			2006			2007⁽²⁾
				(HUF billions, except for percentages)
Internal Public Debt		8,008.7			8,608.8			9,153.5			10,552.3			11,103.8
% of Nominal GDP		42.3	%		41.6	%		41.5	%		44.4	%		43.7	%
External Public Debt		2,579.0			2,983.5			3,590.7			4,124.4			4,472.6
% of Nominal GDP		13.6	%		14.4	%		16.3	%		17.3	%		17.6	%
Other Liabilities⁽³⁾		—			—			21.4			29.0			9.1
Total Public Debt		10,587.7			11,592.4			12,765.6			14,676.7			15,585.5
% of Nominal GDP		55.9	%		56.0	%		57.9	%		61.7	%		61.4	%
Nominal GDP		18,941			20,718			22,042			23,795			25,406


Source: GDMA Pte Ltd.

Notes:

(1)		This table shows the public debt of the Republic from the perspective of the economic obligations of the central government. Financial derivatives and mark-to-market deposits from 2005 are included. In this table, external debt refers to government obligations denominated in foreign currency, while internal debt refers to obligations denominated in local currency.

(2)		Preliminary data.


(3)		Including a special item in connection with a debt assumption in 2006.

Although the central government’s gross debt to GDP ratio decreased substantially between 1996 and 2001 as a result of primary budget surplus, the debt redemption effected from privatization proceeds and the significant real GDP growth, this trend has reversed since 2002. In 2002, 2003 and 2004, the central government gross debt to GDP ratio grew due to the expansionary fiscal policy. The fiscal restrictions introduced by the Minister of Finance were set to diminish the budget deficit and thus reduce the central government gross debt to GDP ratio. The total central government debt totaled HUF 15,585.5 billion at the end of 2007, showing an increase of 6.2% in nominal terms compared to the end of the previous year. The government gross debt to GDP ratio in 2007 was 61.3%, as compared to 61.7% as of the end of 2006.

On November 5, 2007, Fitch Ratings changed its foreign currency and local currency sovereign credit ratings outlook of the Republic of Hungary from “negative” to “stable.” The then current ratings were affirmed.

On March 14, 2008, Standard & Poor’s changed the long term foreign currency and local currency debt outlook from “Stable” to “Negative,” the rating remained “BBB+.”

On October 15, 2008, Standard & Poor’s put the sovereign credit rating of Hungary on negative watch list.

On October 17, 2008, Fitch Ratings changed its foreign currency and local currency sovereign credit ratings outlook of the Republic of Hungary from “stable” to “negative.”

On November 10, 2008, Fitch Ratings changed its foreign currency and local currency sovereign credit ratings to BBB and BBB+ respectively. The outlook of the ratings is stable.

External Public Debt

The following table sets forth the external public debt as of December 31, 2007 by category and by currency:


	Amount⁽¹⁾
	(EUR millions,
	except for
	percentages)
By Category
Bank loans (including bank to bank and syndicated loans)		966
Bonds + FRN		13,803
Loans from multilateral financial institutions (e.g., IMF and World Bank)		2,382

Total		17,151


By Currency
Euro		100	%
U.S. dollar		0	%
British pound		0	%
Other currencies		0	%

Total		100	%

By Currency	(before swaps)
Euro		74	%
JPY		7	%
U.S. dollar		6	%
Swiss franc		0	%


	Amount⁽¹⁾
	(EUR millions,
	except for
	percentages)
British pound		13	%

Total		100	%


Source: GDMA Pte Ltd.

Note:

(1)		External short-term and long-term debt liabilities of the government sector (financial derivatives are excluded, whereas mark-to-market deposits are included). In this table external debt refers to governmental obligations denominated in foreign currency.

In January 2007, the Republic issued a EUR 1 billion bond due in 2017. In October 2007, the Republic issued JPY 25 billion Samurai bonds due in 2017. In April 2008, the Republic issued a two-tranche bond totaling CHF 350 million maturing in 2013 and in 2016. In June 2008, the Republic issued a EUR 1.5 billion bond due in 2018.

External Public Debt Service and Schedule of Payments

Neither the Republic nor the NBH has ever defaulted on the payment of the principal of, or premium or interest on, any debt obligation issued by it.

The following table sets forth the schedule of repayments on external public debt as of December 31, 2007:

Schedule of Payments on External Public Debt as of December 31, 2007⁽¹⁾


											Other monetary institutions and
			Central bank and general government								other sectors
							General government
															Other
									Forint				Other		sectors
					Central				denominated				monetary		(guaranteed
Date of maturity	Total				bank				bonds				institutions		loans)
First quarter 2008		818.0		334.7		99.4		235.3		112.0		483.4		476.0		7.3
Second quarter 2008		2,492.2		1,315.7		2.3		1,313.4		776.5		1,176.5		1,169.2		7.3
Third quarter 2008		837.3		485.6		2.3		483.3		352.0		351.7		344.4		7.3
Fourth quarter 2008		1,004.3		230.3		2.3		228.0		112.0		774.0		752.4		21.6
2008		5,151.9		2,366.3		106.2		2,260.1		1,352.5		2,785.6		2,742.0		43.6
First quarter 2009		2,333.5		631.4		—		631.4		134.1		1,702.0		1,693.7		8.3
Second quarter 2009		2,657.9		1,515.3		—		1,515.3		1,185.9		1,142.6		1,120.2		22.4
Third quarter 2009		2,026.4		1,473.8		—		1,473.8		796.7		552.6		545.3		7.3
Fourth quarter 2009		1,685.2		684.7		—		684.7		663.7		1,000.5		978.6		21.9
2009		8,703.1		4,305.3		—		4,305.3		2,780.3		4,397.8		4,337.9		59.9
2010		7,414.4		3,906.7		48.2		3,858.5		2,594.8		3,507.7		3,446.3		61.5
2011		5,921.5		2,971.0		144.9		2,826.1		682.9		2,950.5		2,879.2		71.3
2012		4,940.2		2,870.9		—		2,870.9		1,496.2		2,069.3		1,960.7		108.6
2013		3,119.3		2,097.5		61.7		2,035.8		656.0		1,021.8		961.0		60.8
2014		4,447.8		2,819.6		—		2,819.6		529.4		1,628.2		1,562.4		65.7
2015		2,437.6		1,697.1		33.2		1,663.8		485.6		740.6		677.3		63.3
2016		4,494.7		2,738.8		—		2,738.8		559.4		1,755.9		1,695.6		60.3
2017		3,779.2		3,526.4		—		3,526.4		1,019.5		252.9		195.8		57.1
2018		111.3		2.7		—		2.7		—		108.6		53.3		55.3
After		3,828.7		3,025.5		—		3,025.5		770.5		803.2		364.4		438.8

Total		54,349.7		32,327.6		394.2		31,933.4		12,927.2		22,022.0		20,876.0		1,146.1


Source: NBH


Note:

(1)		In this table, external debt refers to governmental obligations denominated in foreign currency. Financial derivatives are included, whereas mark-to-market deposits are excluded.

Internal Public Debt

As of December 31, 2007, Hungary’s total internal public debt, including the social security and extra-budgetary funds, was HUF 11,103.8 billion. As of December 31, 2007, almost all of the government’s internal debt represented either treasury bills or bonds (with less than 1.5% of the government’s internal debt consisting of loans from EIB and EBRD).

Within the total HUF denominated government debt, publicly issued government securities have been playing a predominant role, reaching a total share of 90% in 2003, whereas in 2007 the share of government securities was 99%. Raising public funds on the domestic market depends to a large degree upon the issuance of government bonds. Of the total amount of publicly issued HUF government securities outstanding, the share of government bonds increased to approximately 80% in 2007.

Although it is currently the Republic’s policy to finance budget deficits partly with internal debt, and partly by utilizing the international markets. The issuance strategy is determined by a benchmark for the composition of debt portfolio. The weight of internal (domestic currency) debt ranges between 68% and 75% in the benchmark portfolio; the weight of external (foreign currency) debt is 25% to 32%. The average maturity of internal debt was increased to 3.44 years by the end of 2003, 3.46 years by the end of 2004, 3.57 years by the end of 2005, 3.64 years by the end of 2006, and 4.01 years by the end of 2007.

The government has also guaranteed certain Hungarian indebtedness. As of December 31, 2007, these guarantees totaled HUF 1,970.1 billion. According to GFS methodology, guarantees are not included in the governmental debt and only affect the central governmental deficit if and when the government is obliged to make a payment under the guarantee.

Government Obligations to the NBH

The following table shows the government’s obligations to the NBH, including those due to net foreign currency losses, as of December 31 for the years indicated:


	As of December 31,
	2003		2004		2005		2006		2007
	(HUF billions)
Short-term		198.1		194.1		154.7		150.7		146.7
Long-term		608.6		331.5		91.9		81.9		—

Total		806.7		525.5		246.6		232.6		146.7


Source: NBH

Gross External Debt

The following table sets forth the distribution and maturity of gross external debt in the Republic of Hungary as of December 31, 2007:

Gross External Debt⁽¹⁾


	December 31, 2007
	Amount of		% Medium
	Debt		and Long
	(EUR
	millions)		(%)
Obligor
National Bank of Hungary⁽²⁾		628.0		62.8
The Republic⁽²⁾		32,783.5		97.4
Private Sector^{(2) (3)}		64,582.1		79.1

Total^{(2) (3)}		97,993.6		85.1

Financial derivative liabilities		2,174.7
Entire economy (including financial derivative liabilities)		100,168.3


Source:		NBH

Notes:

(1)		In this table, external debt refers to governmental obligations owed to non-resident entities.

(2)		External debt as defined in External Debt Statistics: Guide for Compilers and Users (IMF 2003). Financial derivatives are not included.

(3)		Direct investment debt liabilities included.

Selected Annual BOP and IIP Figures and Debt Service Indicators of Hungary (BOP Basis)⁽¹⁾


	2003		2004		2005		2006		2007
	(in EUR millions)
Gross foreign debt (including intercompany loans)		47,627.2		57,060.1		68,004.0		83,253.5		100,440.7
Gross foreign debt (excluding intercompany loans)		38,801.6		47,504.0		57,453.6		68,489.4		81,332.8
Gross foreign debt denominated in foreign currencies (excluding intercompany loans)		26,920.2		31,540.4		40,934.3		48,380.5		58,590.1
Net foreign debt (including intercompany loans)		20,971.1		26,337.1		30,371.6		38,279.7		48,756.5
Net foreign debt (excluding intercompany loans)		16,122.6		21,186.3		24,818.6		31,111.9		40,935.0
Net foreign debt denominated in foreign currencies (excluding intercompany loans)		8,006.1		11,253.9		14,578.3		20,380.6		27,954.1
Reserves (RES)		10,141.7		11,702.6		15,721.3		16,396.8		16,385.5
Net reserves (NRES)⁽²⁾		9,158.8		11,445.7		15,473.2		16,099.2		16,151.7
Direct investment in Hungary		38,328.7		45,881.1		52,370.4		62,350.0		70,223.9
Equity capital and reinvested earnings		33,238.9		40,425.9		46,670.2		54,868.2		61,711.4
Other capital (intercompany loans)		5,089.8		5,455.2		5,700.2		7,481.8		8,512.4
Direct investment abroad		2,782.3		4,412.1		6,600.5		9,537.8		11,071.5
Equity capital and reinvested earnings		2,541.0		4,107.8		6,453.2		9,223.8		10,380.5
Other capital (intercompany loans)		241.3		304.3		147.3		314.0		691.0

Exports		37,906.9		44,506.7		49,672.3		58,373.4		68,378.6
Imports		40,804.5		47,369.2		51,882.4		60,424.1		68,060.2
Exports of goods and services (XGS)		46,029.4		53,178.2		60,023.5		68,998.2		80,823.6
Imports of goods and services (MGS)		48,879.0		55,556.9		61,101.1		69,803.1		79,453.8


	2003			2004			2005			2006			2007
	(in EUR millions)
Gross interest expenditures		1,690.1			2,144.1			2,610.2			2,896.9			3,721.0
Net interest expenditures		823.4			1,382.1			1,771.2			1,714.5			2,148.6
Direct investment, income on equity capital, net		(2,965.3	)		(3,537.2	)		(3,830.7	)		(4,495.6	)		(5,752.2	)
Current account balance		(5,933.0	)		(7,078.0	)		(6,655.0	)		(6,793.8	)		(6,510.1	)
Direct investment in Hungary, net		1,887.5			3,633.3			6,172.1			6,024.0			4,372.8
Equity capital and reinvested earnings, net		1,123.5			3,309.0			5,884.1			3,421.3			3,346.9
Other capital (Intercompany loans), net		764.0			324.3			288.0			2,602.7			1,025.9
Direct investment abroad, net		(1,463.3	)		(892.1	)		(1,755.5	)		(3,126.3	)		(2,764.8	)
Equity capital and reinvested earnings, net		(1,357.6	)		(822.9	)		(1,932.8	)		(2,879.4	)		(2,640.3	)
Other capital (Intercompany loans), net		(105.8	)		(69.1	)		177.3			(246.9	)		(124.5	)
Total Debt Service denominated in foreign currencies (TDS) (since 1995, excluding intercompany loans)⁽³⁾		6,549.3			8,217.0			9,666.1			9,071.3			10,507.3
Total Debt Service denominated in foreign currencies (TDS) (since 1995, excluding intercompany loans)⁽⁴⁾		5,682.6			7,455.0			8,827.1			7,888.9			8,934.9
Prepayments		248.3			1.4			20.2			49.1			116.6

Memorandum:
GDP/P		74,693.1			82,297.4			88,864.6			90,084.5			101,092.1
								(	%)
Gross foreign debt (including intercompany loans)/GDP		63.8			69.3			76.5			92.4			99.4
Gross foreign debt (excluding intercompany loans)/GDP		51.9			57.7			64.7			76.0			80.5
Gross foreign debt denominated in foreign currencies (excluding intercompany loans)/GDP		36.0			38.3			46.1			53.7			58.0
Net foreign debt (including intercompany loans)/ GDP		28.1			32.0			34.2			42.5			48.2
Net foreign debt (excluding intercompany loans)/GDP		21.6			25.7			27.9			34.5			40.5
Net foreign debt denominated in foreign currencies (excluding intercompany loans)/GDP		10.7			13.7			16.4			22.6			27.7
Total Debt Service denominated in foreign currencies (TDS) (since 1995, excluding intercompany loans)⁽³⁾/GDP		8.4			10.0			10.9			10.0			10.3
Total Debt Service denominated in foreign currencies (TDS) (since 1995, excluding intercompany loans)⁽⁴⁾/GDP		7.3			9.1			9.9			8.7			8.7
Current account balance/GDP		(7.9	)		(8.6	)		(7.5	)		(7.5	)		(6.4	)
Gross foreign debt denominated in foreign currencies (excluding intercompany loans)/XGS		58.5			59.3			68.2			70.1			72.5
Net foreign debt denominated in foreign currencies (excluding intercompany loans)/XGS		17.4			21.2			24.3			29.5			34.6


	2003		2004		2005		2006		2007
	(in EUR millions)
Total Debt Service denominated in foreign currencies (TDS) (since 1995, excluding intercompany loans)⁽³⁾/XGS		13.7		15.4		16.1		13.1		12.9
Total Debt Service denominated in foreign currencies (TDS) (since 1995, excluding intercompany loans)⁽⁴⁾/XGS		11.8		14.0		14.7		11.4		10.9
Gross interest payments/XGS		3.7		4.0		4.3		4.2		4.6
Net interest payments/XGS		1.8		2.6		3.0		2.5		2.7

Import coverage indicator (months) (RES)		3.0		3.0		3.6		3.3		2.9
Import coverage indicator (months) (NRES)		2.7		2.9		3.6		3.2		2.8


Source:		NBH

Notes:

(1)		The debt service indicators do not contain prepayments. The GDP figures for 2003 are preliminary data of the Hungarian Central Statistical Office.

(2)		(NRES) Reserves less NBH short-term liabilities.

(3)		(TDS) Medium-term credit amortization and gross interest expenditures.

(4)		(TDS) Medium-term credit amortization and net interest expenditures.

Relations with Multilateral Financial Institutions

European Bank for Reconstruction and Development (EBRD)

Since 1991, the EBRD has been involved in a number of state and non-state projects, both in the form of equity participation and loans. The total participation of the EBRD between 1991 and the end of 2007 was approximately EUR 1.7 billion.

Council of Europe Development Bank (CEB)

Hungary joined the CEB in 1998. Since that time, the bank’s activity has been concentrating on state- initiated projects (flood control systems, social housing, financing SMEs, and protection of national heritage). Since the Republic’s accession to the CEB, an amount of EUR 1,067 million has been approved by the bank.

In 2007, CEB prepared its country strategy related to Hungary for the period of 2007–2009. According to this strategy the bank plans to lend in excess of EUR 680 million.

Under the new strategy, the latest framework agreement with the Republic was signed in September 2007, whereby CEB undertook to co-finance social housing and housing related environment protection schemes in the amount of EUR 150 million.

European Investment Bank (EIB)

Since 1990, the EIB has been financing different government and non-government projects in Hungary. Between 2000 and 2005, the EIB financed state and non-state projects granting loans worth Euro 4,277.4 million in total. In 2006, the EIB arranged further loans amounting to EUR 1,160 million.

Using a Framework Agreement with the Republic of Hungary, the EIB finances primarily infrastructure, environmental protection, and energy sector projects. Within this Framework Agreement, in 2007, four new facility agreements were signed in the amount of EUR 565 million.

International Finance Corporation (IFC)

Between 1987 and 2003, the IFC financed 28 Hungarian projects worth approximately USD 341 million. Since 2003, the IFC’s main financing activities have been in the form of grants and guarantees to the Hungarian Energy Efficiency Co-financing Program (HEECP), as well as technical assistance with projects aimed at increasing the efficiency of energy consumption in Hungary.

International Monetary Fund (IMF), the European Union (EU) and the World Bank

TABLES AND SUPPLEMENTARY INFORMATION

External Funded Convertible Currency Debt of the NBH and the Republic

(As of December 31, 2007)


	Interest		Year				Original		Principal
Title	rate (%)		Issue		Maturity⁽¹⁾		amount contracted		amount outstanding
A. NATIONAL BANK OF HUNGARY
1. U.S. dollar Debt
a. Bonds										(credit)/debit
USD Bond		8.875		1993		2013	USD	200,000,000	USD		200,000,000

Total									USD		200,000,000


b. Swap Arrangements
USD/EUR		8.875		1999		2013		—	USD		(200,000,000	)
USD/EUR		7.334329		1999		2000-12		—	USD		(18,180,349.47	)
USD/EUR		6.226404		1999		2000-13		—	USD		(33,158,357.20	)
USD/EUR		6.400		1998		2002-10		—	USD		(35,000,000.00	)
USD/EUR		6.400		1999		2002-10		—	USD		(15,000,000	)
USD/EUR		4.500		2004		2013		—	USD		109,415,000.00
USD/EUR	Floating			2004		2013		—	USD		(109,415,000.00	)

Total								—	USD		(301,338,706.71	)


Total U.S. dollar Debt									USD		(101,338,706.71	)


Note:

(1)		In certain cases, this column refers to the dates of scheduled installment payments. Any such payments made prior to December 31, 2007 are reflected as the difference between the amounts in the columns titled “Original Amount Contracted” and “Principal Amount Outstanding.”


	Interest		Year				Original		Principal
Title	rate (%)		Issue		Maturity⁽¹⁾		amount contracted		amount outstanding
2. Euro Debt
a. Swap Arrangements										(credit)/debit
EUR/JPY		8.7275		1997		2011		—	EUR		279,129,556.70
EUR/USD		7.0295		1999		2013		—	EUR		191,410,443.20
EUR/CHF		4.840		2002		2008		—	EUR		28,668,942.98
EUR/CHF		5.160		2002		2008		—	EUR		1,662,125.34
EUR/USD		5.495		1999		2000-12		—	EUR		17,389,060.27
EUR/USD		4.4325		1999		2000-13		—	EUR		31,746,794.31
EUR/USD		5.350		1998		2002-10		—	EUR		31,876,747.98
EUR/USD		4.7225		1999		2002-10		—	EUR		14,365,426.20
EUR/EUR		8.7275		2000		2011		—	EUR		(279,129,556.70	)
EUR/EUR	Floating			2000		2011		—	EUR		279,129,556.70
EUR/EUR		7.0295		2000		2013		—	EUR		(191,410,443.10	)
EUR/EUR	Floating			2000		2013		—	EUR		191,410,443.10
EUR/EUR	Floating			2002		2010		—	EUR		(2,548,000	)
EUR/EUR		5.1725		2002		2010		—	EUR		2,548,000
EUR/EUR		5.625		2001		2011		—	EUR		(200,000,000	)


	Interest		Year				Original		Principal
Title	rate (%)		Issue		Maturity⁽¹⁾		amount contracted		amount outstanding
EUR/EUR	Floating			2001		2011		—	EUR	200,000,000
EUR/EUR	Floating			2002		2014		—	EUR	(30,000,000	)
EUR/EUR		5.280		2002		2014		—	EUR	30,000,000
EUR/EUR	Floating			2002		2015		—	EUR	(30,452,000	)
EUR/EUR		5.368		2002		2015		—	EUR	30,452,000
EUR/JPY	Floating			2006		2010		—	EUR	(6,250,000.00	)
EUR/JPY	Floating			2006		2010		—	EUR	(7,640,000.00	)
EUR/JPY		8.230		1996		2008		—	EUR	175,099,959.10
EUR/EUR		4.7681		2007		2017		—	EUR	50,000,000.00
EUR/EUR	Floating			2007		2017		—	EUR	(50,000,000.00	)
EUR/EUR		4.254		2007		2014		—	EUR	30,000,000.00
EUR/EUR	Floating			2007		2014		—	EUR	(30,000,000.00	)
EUR/EUR		3.903		2006		2011		—	EUR	40,000,000.00
EUR/EUR	Floating			2006		2011		—	EUR	(40,000,000.00	)
EUR/EUR	Floating			2000		2008		—	EUR	1,750,993,959.10
EUR/EUR		8.230		2000		2008		—	EUR	(1,750,993,959.10	)

Total								—	EUR	757,459,055.08


Total Euro Debt									EUR	757,459,055.08


U.S. Dollar equivalent									USD	1,111,767,867.47


Note:

(1)		In certain cases, this column refers to the dates of scheduled installment payments. Any such payments made prior to December 31, 2007 are reflected as the difference between the amounts in the columns titled “Original Amount Contracted” and “Principal Amount Outstanding.”

Interest

Year

Original

Principal

Title

rate (%)

Issue

Maturity

amount contracted

amount outstanding

3. Pound Sterling Debt

—

a. Swap Arrangements

—

(credit)/debit

Total

—

GBP

—

Total Pound Sterling Debt

GBP

—

U.S. Dollar equivalent

USD

—


	Interest		Year				Original		Principal
Title	rate (%)		Issue		Maturity		amount contracted		amount outstanding
4. Japanese Yen Debt
a. Bonds										(credit)/debit
JPY Bond		5.200		1996		2011		—	JPY		40,000,000,000
JPY Bond		6.900		1995		2010		—	JPY		15,000,000,000
JPY Bond		5.000		1995		2008		—	JPY		25,000,000,000
JPY Bond		6.000		1995		2015		—	JPY		10,000,000,000

Total								—	JPY		90,000,000,000

b. Swap Arrangements								—
JPY/EUR		5.200		1997		2011		—	JPY		(40,000,000,000	)
JPY/EUR		5.000		2006		2008		—	JPY		1,100,000,000


	Interest		Year				Original		Principal
Title	rate (%)		Issue		Maturity		amount contracted		amount outstanding
JPY/EUR		6.900		2006		2010		—	JPY	900,000,000
JPY/EUR		5.000		1996		2008		—	JPY	(25,000,000,000	)
JPY/JPY		6.900		1997		2010		—	JPY	1,100,000,000
JPY/JPY	Floating			1997		2010		—	JPY	(1,100,000,000	)
JPY/JPY		5.000		1997		2008		—	JPY	5,000,000,000
JPY/JPY	Floating			1997		2008		—	JPY	(5,000,000,000	)
JPY/JPY	Floating			2007		2010		—	JPY	7,500,000,000
JPY/JPY		6.900		2007		2010		—	JPY	(7,500,000,000	)

Total								—	JPY	(63,000,000,000	)

Total Japanese Yen Debt									JPY	27,000,000,000


U.S. Dollar equivalent									USD	238,449,684.26

Interest

Year

Original

Principal

Title

rate (%)

Issue

Maturity

amount contracted

amount outstanding

5. Swiss Franc Debt

—

a. Swap Arrangements

—

(credit)/debit

CHF/EUR

Floating

2002

2008

—

CHF

(42,000,000

)

CHF/EUR

3.375

2002

2008

—

CHF

(2,440,000

)

Total

—

CHF

(44,440,000

)

Total Swiss Franc Debt

CHF

(44,440,000

)

U.S. Dollar equivalent

USD

(39,241,902.56

)

NATIONAL BANK OF HUNGARY

Total External Funded Convertible Currency Debt U.S. Dollar equivalent

USD

1,209,636,942.47


	Interest		Year				Original		Principal
Title	rate (%)		Issue		Maturity⁽¹⁾		amount contracted		amount outstanding
B. REPUBLIC OF HUNGARY
1. U.S. dollar Debt
a. World Bank
4113HU	MT⁽²⁾			1996		2006-11	USD	7,750,000	USD	527,722
4275HU		6.4		1998		2010	USD	150,000,000	USD	50,000,000

Total									USD	50,527,722

b. EIB
Roads I	MT			1993		2013	BCU	50,000,000	USD	18,180,349
Roads II	MT			1992		2012	BCU	72,000,000	USD	33,158,357

Total									USD	51,338,706

c. Bonds
USD Bond		4.750		2005		2015	USD	1,500,000,000	USD	1,500,000,000
USD Bond		2.750		1975		2027	USD	669,500	USD	238,900

Total									USD	1,500,238,900

d. Swap Arrangements


	Interest		Year				Original			Principal
Title	rate (%)		Issue		Maturity⁽¹⁾		amount contracted			amount outstanding
USD/EUR		6.40		2002		2010	USD	(105,000,000	)	USD	(35,000,000	)
USD/EUR		6.40		2000		2010	USD	(45,000,000	)	USD	(15,000,000	)
USD/EUR		7.33		2000		2012	USD	(50,500,971	)	USD	(18,180,349	)
USD/EUR		6.23		2000		2013	USD	(77,369,499	)	USD	(33,158,357	)
USD/EUR	MT			2004		2011	USD	(3,207,597	)	USD	(527,721	)
USD/EUR		4.75		2005		2015	USD	(500,000,000	)	USD	(500,000,000	)
USD/EUR		4.75		2005		2015	USD	(500,000,000	)	USD	(500,000,000	)
USD/EUR		4.75		2005		2015	USD	(500,000,000	)	USD	(500,000,000	)


Total										USD	(1,601,866,428	)


Total U.S. dollar Debt										USD	238,900


Notes:

(1)		In certain cases, this column refers to the dates of scheduled installment payments. Any such payments made prior to December 31, 2007 are reflected as the difference between the amounts in the columns titled “Original Amount Contracted” and “Principal Amount Outstanding.”

(2)		Multiple tranches – different fixed rates.


	Interest		Year				Original		Principal
Title	rate (%)		Issue		Maturity⁽¹⁾		amount contracted		amount outstanding
2. Euro Debt
a. World Bank
3596HU	MT			1993		2008	DEM	132,000,000	EUR	1,461,525
3635HU	MT			1993		2008	DEM	29,000,000	EUR	417,485
4230HU	MT			1997		2010	DEM	69,000,000	EUR	3,520,923

Total									EUR	5,399,934

b. EIB
Bp Wastewater	Floating			2006		2017	EUR	94,000,000	EUR	94,000,000
Environment		4.67		2001		2013	EUR	43,000,000	EUR	43,000,000
Environment II	Floating			2002		2017	EUR	80,000,000	EUR	80,000,000
Environment III		4.49		2003		2014	EUR	45,900,000	EUR	45,900,000
Flood protection	Floating			2001		2012	EUR	60,000,000	EUR	50,000,000
Railways I	MT			1998		2017	EUR	60,000,000	EUR	39,310,345
Railways I-B	Floating			2001		2012	EUR	40,000,000	EUR	33,333,333
Railways II-B	Floating			2001		2013	EUR	90,000,000	EUR	90,000,000
Railways III	Floating			2002		2014	EUR	40,000,000	EUR	40,000,000
Railways IV	Floating			2004		2014	EUR	27,000,000	EUR	27,000,000
Railways V	Floating			2005		2015	EUR	27,000,000	EUR	27,000,000
Roads III	Floating			2003-4		2014	EUR	75,000,000	EUR	75,000,000
Roads IV	Floating			2003		2014	EUR	190,000,000	EUR	119,000,000
M0 Motorway	Floating			2005		2015	EUR	50,000,000	EUR	50,000,000
M3 Motorway	Floating			2007		2017	EUR	320,000,000	EUR	1,966,523
M4 Underground	Floating			2005		2016	EUR	691,000,000	EUR	472,000,000
Structural funds	Floating			2004		2017	EUR	445,000,000	EUR	330,000,000
Research and Innovation	Floating			2007		2012	EUR	165,000,000	EUR	962,288


Total									EUR	1,618,472,489


	Interest		Year				Original		Principal
Title	rate (%)		Issue		Maturity⁽¹⁾		amount contracted		amount outstanding
c. Bonds
EUR Bond		4.375		1999		2009	EUR	500,000,000	EUR	500,000,000
EUR Bond		5.625		2001		2011	EUR	1,000,000,000	EUR	1,000,000,000
EUR Bond		4.500		2003		2013	EUR	1,000,000,000	EUR	1,000,000,000
EUR Bond		4.000		2003		2010	EUR	1,000,000,000	EUR	1,000,000,000
EUR Bond		4.500		2004		2014	EUR	1,000,000,000	EUR	1,000,000,000
EUR Bond		3.625		2004		2011	EUR	1,000,000,000	EUR	1,000,000,000
EUR Bond		3.875		2005		2020	EUR	1,000,000,000	EUR	1,000,000,000
EUR Bond	Floating			2005		2012	EUR	500,000,000	EUR	1,000,000,000
EUR Bond		3.5		2006		2016	EUR	1,000,000,000	EUR	1,000,000,000
EUR Bond		4.375		2007		2017	EUR	1,000,000,000	EUR	1,000,000,000


Total									EUR	9,500,000,000

d. Other loans raised Council of Europe
Development Bank loans	Various			1999-2007		2009-17	EUR	586,247,184	EUR	387,719,698
EBRD loans	Floating			2003		2014	EUR	4,739,006	EUR	2,921,694
KfW DEM loan		6.0583		1999-2000		2015	DEM	120,000,000	EUR	37,756,911
KfW EUR loan		5.715		2000		2008	EUR	71,600,000	EUR	8,950,000
Bilateral agreements	Floating			2007	Various		EUR	500,000,000	EUR	428,250,000
Syndicated loan	Floating			2003		2008	EUR	500,000,000	EUR	500,000,000


Total									EUR	1,365,598,303

e. Other loans assumed
EIB/Railways II-A	Various			2002		2015	EUR	40,000,000	EUR	37,000,000
EIB/M3 Toll Motorway	MT			2002		2015	EUR	49,599,224	EUR	30,522,599
EUR loans	Various			2001-04		2006-18	EUR	416,620,707	EUR	158,112,749


Total									EUR	225,635,348

f. Swap Arrangements
EUR/USD		4.72		2000		2010	EUR	43,096,279	EUR	14,365,426
EUR/USD		5.50		2000		2012	EUR	48,302,945	EUR	17,389,060
EUR/USD		4.43		2000		2013	EUR	74,075,853	EUR	31,746,794
EUR/CHF		4.84		2002		2008	EUR	28,668,942	EUR	28,668,942
EUR/CHF		5.16		2002		2008	EUR	1,662,125	EUR	1,662,125
EUR/USD		5.35		2002		2010	EUR	95,630,244	EUR	31,876,748
EUR/USD		6.95		2004		2011	EUR	2,509,806	EUR	412,928
EUR/USD		3.8075		2005		2015	EUR	383,612,000	EUR	383,612,000
EUR/USD		3.815		2005		2015	EUR	383,612,000	EUR	383,612,000
EUR/USD	Floating			2005		2015	EUR	383,612,000	EUR	383,612,000
EUR/GBP		4.495		2004		2014	EUR	753,200,000	EUR	753,200,000
EUR/GBP		3.82		2005		2017	EUR	486,948,000	EUR	486,948,000
EUR/GBP	Floating			2005		2017	EUR	250,852,000	EUR	250,852,000
EUR/JPY		3.917		2004		2009	EUR	375,000,000	EUR	375,000,000
EUR/JPY	Floating			2005		2010	EUR	225,411,000	EUR	225,411,000
EUR/JPY		3.092		2005		2012	EUR	338,320,000	EUR	338,320,000
EUR/JPY		3.82		2006		2013	EUR	355,745,000	EUR	355,745,000
EUR/GBP		4.14		2006		2016	EUR	478,599,000	EUR	478,599,000
EUR/GBP	Floating			2006		2016	EUR	246,551,000	EUR	246,551,000
EUR/JPY		4.9855		2007		2017	EUR	151,112,000	EUR	151,112,000


	Interest		Year				Original			Principal
Title	rate (%)		Issue		Maturity⁽¹⁾		amount contracted			amount outstanding
EUR/EUR		5.625		2001		2011	EUR	200,000,000		EUR	200,000,000
EUR/EUR	Floating			2001		2011	EUR	(200,000,000	)	EUR	(200,000,000	)
EUR/EUR		5.28		2002		2014	EUR	30,000,000		EUR	30,000,000
EUR/EUR	Floating			2002		2014	EUR	(30,000,000	)	EUR	(30,000,000	)
EUR/EUR		5.368		2002		2015	EUR	30,452,000		EUR	30,452,000
EUR/EUR	Floating			2002		2015	EUR	(30,452,000	)	EUR	(30,452,000	)
EUR/EUR		5.1725		2002		2010	EUR	2,548,000		EUR	2,548,000
EUR/EUR	Floating			2002		2010	EUR	(2,548,000	)	EUR	(2,548,000	)
EUR/EUR		3.625		2004		2011	EUR	(330,000,000	)	EUR	(330,000,000	)
EUR/EUR	Floating			2004		2011	EUR	330,000,000		EUR	330,000,000
EUR/EUR		3.253		2005		2012	EUR	250,000,000		EUR	250,000,000
EUR/EUR	Floating			2005		2012	EUR	(250,000,000	)	EUR	(250,000,000	)
EUR/EUR		3.259		2005		2012	EUR	250,000,000		EUR	250,000,000
EUR/EUR	Floating			2005		2012	EUR	(250,000,000	)	EUR	(250,000,000	)
EUR/EUR		4.500		2004		2014	EUR	(300,000,000	)	EUR	(300,000,000	)
EUR/EUR	Floating			2004		2014	EUR	300,000,000		EUR	300,000,000
EUR/EUR		4.500		2004		2014	EUR	(700,000,000	)	EUR	(700,000,000	)
EUR/EUR	Floating			2004		2014	EUR	700,000,000		EUR	700,000,000
EUR/EUR		4.495		2004		2014	EUR	(300,000,000	)	EUR	(300,000,000	)
EUR/EUR	Floating			2004		2014	EUR	300,000,000		EUR	300,000,000
EUR/EUR		3.875		2005		2020	EUR	(200,000,000	)	EUR	(200,000,000	)
EUR/EUR	Floating			2005		2020	EUR	200,000,000		EUR	200,000,000
EUR/EUR		3.893		2006		2012	EUR	330,000,000		EUR	330,000,000
EUR/EUR	Floating			2006		2012	EUR	(330,000,000	)	EUR	(330,000,000	)
EUR/EUR		3.4		2006		2014	EUR	250,000,000		EUR	250,000,000
EUR/EUR	Floating			2006		2014	EUR	(250,000,000	)	EUR	(250,000,000	)
EUR/EUR		4.99		2006		2014	EUR	350,000,000		EUR	350,000,000
EUR/EUR	Floating			2006		2014	EUR	(350,000,000	)	EUR	(350,000,000	)
EUR/EUR		3.5		2006		2016	EUR	340,000,000		EUR	340,000,000
EUR/EUR	Floating			2006		2016	EUR	(340,000,000	)	EUR	(340,000,000	)
EUR/EUR		3.821		2006		2013	EUR	120,000,000		EUR	120,000,000
EUR/EUR	Floating			2006		2013	EUR	(120,000,000	)	EUR	(120,000,000	)
EUR/EUR		4.375		2007		2017	EUR	340,000,000		EUR	340,000,000
EUR/EUR	Floating			2007		2017	EUR	(340,000,000	)	EUR	(340,000,000	)
EUR/EUR		5.374		2007		2014	EUR	170,000,000		EUR	170,000,000
EUR/EUR	Floating			2007		2014	EUR	(170,000,000	)	EUR	(170,000,000	)


Total										EUR	4,938,696,024

Total Euro Debt										EUR	17,653,802,098


U.S. Dollar equivalent										USD	25,911,539,085


Note:

(1)		In certain cases, this column refers to the dates of scheduled installment payments. Any such payments made prior to December 31, 2007 are reflected as the difference between the amounts in the columns titled “Original Amount Contracted” and “Principal Amount Outstanding.”


	Interest		Year				Original			Principal
Title	rate (%)		Issue		Maturity⁽¹⁾		amount contracted			amount outstanding
3. Pound Sterling Debt
a. Bonds
GBP Bond		5.500		2004		2014	GBP	500,000,000		GBP	500,000,000
GBP Bond		5.000		2005		2017	GBP	500,000,000		GBP	500,000,000
GBP Bond		5.000		2006		2016	GBP	500,000,000		GBP	500,000,000


Total			��							GBP	1,500,000,000

b. Swap Arrangements
GBP/EUR		5.500		2004		2014	GBP	(500,000,000	)	GBP	(500,000,000	)
GBP/EUR		5.000		2005		2017	GBP	(330,000,000	)	GBP	(330,000,000	)
GBP/EUR		5.000		2005		2017	GBP	(170,000,000	)	GBP	(170,000,000	)
GBP/EUR		5.000		2006		2016	GBP	(330,000,000	)	GBP	(330,000,000	)
GBP/EUR		5.000		2006		2016	GBP	(170,000,000	)	GBP	(170,000,000	)


Total										GBP	(1,500,000,000	)


Total Pound Sterling Debt										GBP	—


U.S. Dollar equivalent										USD	—


Note:

(1)		In certain cases, this column refers to the dates of scheduled installment payments. Any such payments made prior to December 31, 2007 are reflected as the difference between the amounts in the columns titled “Original Amount Contracted” and “Principal Amount Outstanding.”


	Interest		Year				Original		Principal
Title	rate (%)		Issue		Maturity⁽¹⁾		amount contracted		amount outstanding
4. Japanese Yen Debt
a. Bonds
JPY Bond		1.09		2004		2009	JPY	50,000,000,000	JPY	50,000,000,000
JPY Bond		0.62		2005		2010	JPY	30,000,000,000	JPY	30,000,000,000
JPY Bond		0.96		2005		2012	JPY	45,000,000,000	JPY	45,000,000,000
JPY Bond		1.67		2006		2013	JPY	50,000,000,000	JPY	50,000,000,000
JPY Bond		2.11		2007		2017	JPY	25,000,000,000	JPY	25,000,000,000


Total									JPY	200,000,000,000

b. Swap Arrangements JPY/EUR		1.09		2004		2009	JPY	50,000,000,000	JPY	(50,000,000,000	)
JPY/EUR		0.62		2005		2010	JPY	30,000,000,000	JPY	(30,000,000,000	)
JPY/EUR		0.96		2005		2012	JPY	45,000,000,000	JPY	(45,000,000,000	)
JPY/EUR		1.67		2006		2013	JPY	50,000,000,000	JPY	(50,000,000,000	)
JPY/EUR		2.11		2007		2017	JPY	25,000,000,000	JPY	(25,000,000,000	)


Total									JPY	(200,000,000,000	)

Total Japanese Yen Debt									JPY	—

U.S. Dollar equivalent									USD	—


Note:

(1)		In certain cases, this column refers to the dates of scheduled installment payments. Any such payments made prior to December 31, 2007 are reflected as the difference between the amounts in the columns titled “Original Amount Contracted” and “Principal Amount Outstanding.”


	Interest		Year				Original			Principal
Title	rate (%)		Issue		Maturity⁽¹⁾		amount contracted			amount outstanding
5. Swiss Franc Debt
a. Loans Assumed
EUROFIMA loans	Floating			2002		2002-08	CHF	46,000,000		CHF	44,440,000


Total										CHF	44,440,000

b. Swap Arrangements
CHF/EUR	Floating			2002		2008	CHF	(42,000,000	)	CHF	(42,000,000	)
CHF/EUR		3.38		2002		2008	CHF	(2,440,000	)	CHF	(2,440,000	)


Total Swiss Franc Debt										CHF	—


U.S. Dollar equivalent										USD	—


Note:

(1)		In certain cases, this column refers to the dates of scheduled installment payments. Any such payments made prior to December 31, 2007 are reflected as the difference between the amounts in the columns titled “Original Amount Contracted” and “Principal Amount Outstanding.”

TABLES AND SUPPLEMENTARY INFORMATION


REPUBLIC OF HUNGARY
Total External Funded Convertible Currency Debt	USD	25,911,777,985

TOTAL EXTERNAL CONVERTIBLE CURRENCY FUNDED DEBT OF THE BANK AND OF THE REPUBLIC⁽¹⁾	USD	27,121,414,927.47

Internal Debt of the Republic


	As of December 31, 2007
							Original
							Amount (HUF and		Principal
	Interest		Year				USD millions)		Amount (HUF and USD
Title	rate (%)		Issue		Maturity		Contracted		millions) Outstanding
1. Loans
a. Taken over at the end of 2002	Floating			2002		2008	HUF	1,660.0	HUF	182.0
b. from EIB	Floating			2007		2022	HUF	148,209.0	HUF	145,500.0


Total Loans									HUF	145,682.0

									USD	844


2. Hungarian Treasury Bonds for the purpose of:

a. 1998-07 Central Budget	Fixed Floating			1997-2007		2008-23	HUF	—	HUF	8,226,938.6
b. Housing Loans	Floating			1992		2016	HUF	83,200.0	HUF	30,060.0
c. Purchase of net ruble receivables held by the Bank		8.4		1992		2002, 07, 12	HUF	48,300.0	HUF	7,132.2
d. Loan Consolidation Program and Bank Consolidation Program	Floating			1993-96		2013-16	HUF	395,000.0	HUF	259,783.0
e. Securitization of non-interests-bearing debt outstanding to the Bank	Floating			1994-96		2004-26	HUF	417,110.0	HUF	135,140.0
f. Bonds given to the Hungarian Privatization and State Holding Company	Floating			1998, 2002		2006-10	HUF	60,148.6	HUF	5,514.3
g. Bonds given to the Postabank as a result of consolidation	Floating, Fixed			1998		1999-08	HUF	129,022.3	HUF	55,022.3
h. Bonds given to the Hungarian Development Bank Ltd.	Fixed			2002		2003-11	HUF	138,537.7	HUF	18,376.2


Total Hungarian Treasury Bonds									HUF	8,737,966.7

									USD	50,622.6


3. Hungarian Treasury Bills:
a. Fixed interest rate		5.25-7.5		2006-7		2008-9		—	HUF	555,184.9
b. Discount		—		2007		2008		—	HUF	1,664,930.3


Total Hungarian Treasury Bills									HUF	2,220,115.2
									USD	12,862.0

As of December 31, 2007

Original

Amount (HUF and

Principal

Interest

Year

USD millions)

Amount (HUF and USD

Title

rate (%)

Issue

Maturity

Contracted

millions) Outstanding

TOTAL REPUBLIC INTERNAL DEBT

HUF

11,103,763.9

U.S. Dollar equivalent⁽²⁾

USD

64,328.6


Sources:		NBH and GDMA Pte Ltd.

Notes:

(1)		All totals calculated on the basis of exchange rates as of December 28, 2007.

(2)		All totals calculated on the basis of exchange rates as of December 28, 2007. The exchange rate was 172.61 HUF/USD as of December 28, 2007.

TABLES AND SUPPLEMENTARY INFORMATION

Guarantees Provided by the Republic
(As of December 31, 2007)


	Principal Amount
	Outstanding
Title	(millions)
Republic Guaranteed Debt in Foreign Currency (expressed in USD equivalents)⁽¹⁾
Loans raised from international financial institutions	USD	567.65
Guarantees for various purposes	USD	905.53
Guarantees based on law	USD	3,142.34

Total Guarantees in Foreign Currency	USD	4,615.52


Republic Guaranteed Debt in HUF
Guarantees for various purposes	HUF	193,125.19
Guarantees based on law	HUF	980,324.39


Total Guarantees in HUF	HUF	1,173,449.58

USD Equivalent⁽¹⁾	USD	6,798.27


TOTAL REPUBLIC FOREIGN CURRENCY AND HUF GUARANTEES	USD	11,413.79


Source: GDMA Pte Ltd.

Note:

(1)		Calculated on the basis of exchange rates as of December 28, 2007.

Hungary 18-KAnnual report (foreign governments)