PROSPECTUS SUPPLEMENT Filed pursuant to Rule 424(b)(5)
(To Prospectus dated November 12, 2004) under the Securities Act of 1933
Registration No. 333-10126
$100,000,000
[National Symbol of Hungary]
Republic of Hungary
Floating Rate Notes due 2006
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We are offering $100,000,000 of Floating Rate Notes due 2006 (the
"Notes"). The Notes will constitute direct, unconditional, unsecured and general
obligations of the Republic. The Notes will rank equally in right of payment
with all other unsecured and unsubordinated obligations of the Republic. The
full faith and credit of the Republic will be pledged for the due and punctual
payment of all principal and interest on the Notes. We will pay interest
quarterly on March 15, June 15, September 15, and December 15 of each year,
beginning on March 15 2005. The Notes will be issued in denominations of $1,000
and integral multiples of $1,000. The Notes contain "collective action clauses"
that permit the Republic, with the consent of the holders of 75% of the
principal amount of the Notes, to amend the terms of the Notes (including the
principal amount, currency of payment, maturity and all other terms) or to
exchange them for other securities.
We are offering the Notes for sale in the United States and elsewhere
where such offer and sale is permitted. We have not applied to have the Notes
listed and traded on any stock exchange.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities or determined
if this Prospectus Supplement or Prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
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Per Note Total
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Public offering price............................................. 100% $100,000,000
Underwriting discount............................................. 0% $0
Proceeds to the Republic (before expenses)........................ 100% $100,000,000
Interest on the Notes will accrue from December 15, 2004.
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The underwriters are offering the Notes subject to various conditions.
The underwriters expect to deliver the Notes to purchasers on or about December
15, 2004, through the book-entry facilities of The Depository Trust Company,
Euroclear or Clearstream, Luxembourg.
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Deutsche Bank Securities Morgan Stanley
The activities of the underwriters in connection with this transaction
are led jointly by Deutsche Bank Securities Inc. and Morgan Stanley & Co.
International Limited.
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The date of this Prospectus Supplement is December 8, 2004
TABLE OF CONTENTS
Page Page
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Prospectus Supplement Monetary and Financial System.............. 29
Recent Developments.......................... S-1 Public Finance............................. 37
Use of Proceeds.............................. S-1 Hungarian Debt............................. 50
Description of the Notes..................... S-1 Description of the Debt Securities......... 56
Underwriting................................. S-7 Enforceability of Judgments................ 63
General Information.......................... S-8 Taxation................................... 64
Legal Matters................................ S-8 Plan of Distribution....................... 67
Validity of the Securities................. 68
Prospectus Authorized Agent in the United States...... 68
Use of Proceeds.............................. 5 Official Statements and Documents.......... 68
The Republic of Hungary...................... 6 Further Information........................ 68
The Economy.................................. 12 Index to Tables and Supplementary
Privatization................................ 23 Information............................. 69
Balance of Payments and Foreign Trade........ 24
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE ATTACHED PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE
YOU WITH DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES
IN ANY JURISDICTION WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT
THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE ATTACHED
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THE
DOCUMENT.
THE NOTES MAY NOT BE OFFERED OR SOLD IN THE REPUBLIC OF HUNGARY OR TO
ANY RESIDENT THEREOF, NOR MAY THIS PROSPECTUS SUPPLEMENT, THE ATTACHED
PROSPECTUS OR ANY OTHER MATERIAL RELATING TO THE NOTES BE DISTRIBUTED IN HUNGARY
OR TO ANY RESIDENTS THEREOF UNLESS IN ALL CASES PRIOR THERETO ALL APPROPRIATE
APPROVALS (IF REQUIRED) HAVE BEEN OBTAINED FOR THE PUBLIC OFFERING OR PRIVATE
PLACEMENT OF THE NOTES IN HUNGARY OR AS OTHERWISE PERMITTED BY LAW.
OFFERS AND SALES OF THE NOTES ARE SUBJECT TO RESTRICTIONS IN RELATION
TO THE UNITED KINGDOM, DETAILS OF WHICH ARE SET OUT IN "UNDERWRITING" BELOW. THE
DISTRIBUTION OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND
THE OFFERING OF THE NOTES IN CERTAIN OTHER JURISDICTIONS MAY ALSO BE RESTRICTED
BY LAW.
The Republic has made all reasonable inquiries and confirms that this
Prospectus Supplement and the accompanying Prospectus, dated November 12, 2004
contain all information with respect to the Republic and the Notes that is
material in the context of the issue and offering of the Notes, and that this
information is true and accurate in all material respects and is not misleading,
that the opinions and intentions expressed herein and therein are honestly held
and that, to the best of the Republic's knowledge and belief, there are no other
facts the omission of which would make any of this information or the expression
of these opinions and intentions misleading. The Republic accepts responsibility
accordingly.
In this Prospectus Supplement and accompanying Prospectus, except as
otherwise specified, all amounts are expressed in Hungarian forints ("Ft" or
"HUF") or in euro ("Euro" or "EUR"), and in U.S. dollars ("$" or "USD").
i
RECENT DEVELOPMENTS
The National Bank of Hungary reduced the central bank base rate by
0.5% to 10.0% on November 22, 2004.
On November 30, 2004, the Parliament accepted the main figures of the
2005 budget. The planned total expenditures of the central government are HUF
6,582.8 billion, planned total revenues are HUF 5,883.1 billion, which would
result in the central governmental deficit being HUF 699.7 billion. The planned
total expenditures of the general government are HUF 13,090 billion, planned
total revenues are HUF 12,036 billion, which would result in the general
governmental deficit being HUF 1,054 billion, or 4.7% of GDP according to ESA 95
methodology, revenues of private pension funds not included.
On December 1, 2004, the Minister of Finance announced the revision of
the Convergence Program in the light of the decision of the European Union's
Statistical Office ("Eurostat"). Eurostat announced that the revenues of private
pension funds (see "Public Finance - Social Security and Extra-Budgetary Funds -
Pension System" of the Prospectus) can be treated as governmental revenues until
2007. According to the calculations of the Ministry of Finance, the measure will
result in significantly lower deficits (by 0.8-1.0% of GDP).
USE OF PROCEEDS
The Republic will use the proceeds from the sale of the Notes in the
amount of $100,000,000, before payment of legal expenses, for general funding
purposes.
DESCRIPTION OF THE NOTES
The following description briefly summarizes some of the provisions of
the Notes and the Fiscal Agency Agreement (the "Agency Agreement") to be dated
on or about December 15, 2004, between the Republic, and Citibank N.A., London,
as fiscal agent (the "Fiscal Agent" or "Agent") the forms of which have been
filed as exhibits to the Registration Statement under Schedule B, of which this
Prospectus Supplement and the Prospectus form part. You should not assume this
summary is complete. You should read the Registration Statement, including the
exhibits, and in particular the "Description of the Debt Securities" in the
Prospectus.
General
The Notes:
o mature on December 15, 2006.
o bear interest at a floating rate calculated as provided below.
o are to be issued pursuant to the Agency Agreement.
o will be issued without coupons in lawful money of the United
States of America in denominations of $1,000 and integral
multiples thereof.
o will rank at least equally in right of payment with all other
unsecured and unsubordinated payment obligations of the Republic,
except for such obligations as may be preferred by mandatory
provisions of applicable law. The Republic will give no
preference to one obligation over another on the basis of
priority of issue date or currency of payment.
o will not be redeemable prior to maturity at the option of the
Republic or of the registered holders thereof.
o will not be subject to any sinking fund provided by the Republic
for the amortization of the Notes.
o At maturity, you will receive 100% of the principal amount of
your Notes, plus accrued interest to the maturity date.
o The Republic may, without the consent of the holders of the
Notes, issue additional notes having the same ranking and the
same interest rate, maturity and other terms as the Notes. Any
additional notes, together with the Notes, will constitute a
single series of notes under the Agency Agreement.
S-1
Interest:
o will be payable on the dates set forth on the cover of this
Prospectus Supplement (each an "Interest Payment Date") in lawful
money of the United States of America to the registered holders
of the Notes at the close of business on the fifteenth day
(whether or not a business day) preceding such payment date (each
a "Record Date").
o begins to accrue on December 15, 2004.
o payments begin on March 15, 2005.
o will be computed at a rate equal to the three-month USD LIBOR
plus 0.03% per annum on the basis of the actual number of
days in the applicable Interest Period (as defined herein)
divided by 360.
o The term "three-month USD LIBOR" means, with respect to any
Interest Determination Date:
(a) the rate for three-month deposits in United States
dollars commencing on the second London banking day
succeeding the Interest Determination Date, that
appears on the Telerate Page 3750 (as described below)
as of 11:00 a.m., London time, on the Interest
Determination Date; or
(b) if no rate appears on the particular Interest
Determination Date on the Telerate Page 3750, the rate
calculated by the Calculation Agent (as described
below) as the arithmetic mean of at least two offered
quotations obtained by the Calculation Agent after
requesting the principal London offices of each of four
major reference banks in the London interbank market to
provide the Calculation Agent with its offered
quotation for deposits in United States dollars for the
period of three months, commencing on the second London
banking day succeeding the Interest Determination Date,
to prime banks in the London interbank market at
approximately 11:00 a.m., London time, on that Interest
Determination Date and in a principal amount that is
representative for a single transaction in United
States dollars in that market at that time; or
(c) if fewer than two offered quotations referred to in
clause (b) are provided as requested, the rate
calculated by the Calculation Agent as the arithmetic
mean of the rates quoted at approximately 11:00 a.m.,
New York time, on the particular Interest Determination
Date by three major banks in The City of New York
selected by the Calculation Agent for loans in United
States dollars to leading European banks for a period
of three months commencing on the second London banking
day succeeding the Interest Determination Date, and in
a principal amount that is representative for a single
transaction in United States dollars in that market at
that time; or
(d) if the banks so selected by the Calculation Agent are
not quoting as mentioned in clause (c), three-month
USD LIBOR in effect immediately prior to the particular
Interest Determination Date.
o "Telerate Page 3750" means the display on Telerate (or any
successor service) on such page (or any other page as may
replace such page on such service) or such other service or
services as may be nominated by the British Bankers'
Association as the information vendor for the purpose of
displaying the London interbank rates major banks for United
States dollars.
o "London banking day" means a day on which commercial banks
are open for business, including dealings in United States
dollars, in London, England.
o "Interest Determination Date" for any Interest Period will
be the second London banking day preceding the first day of
such Interest Period. The term "Interest Period" refers to
the period from and including December 15, 2004 to but
excluding the first Interest Payment Date and each
successive period from and including an Interest Payment
Date to but excluding the next Interest Payment Date.
o Citibank, N. A., acting through its London office, will
serve as the "Calculation Agent" for the Notes. In the
absence of willful default, bad faith or manifest error, the
Calculation Agent's determination of three-month USD LIBOR
and its calculation of the applicable interest rate for each
S-2
Interest Period will be final and binding. The Calculation
Agent will make available the interest rates for current and
preceding Interest Periods by delivery of such notice
through such medium as available to participants in DTC,
Euroclear and Clearstream Luxemburg, or any successor
thereof, and in accordance with applicable respective rules
and procedures as long as the Notes are held in global form.
In the event that the Notes are held in definitive form, the
interest rates for current and preceding Interest Periods
will be published in the manner described below under "--
Notices". We have the right to replace the Calculation Agent
with the London office of another leading commercial bank or
investment bank in New York. If the appointed office of the
Calculation Agent is unable or unwilling to continue to act
as the Calculation Agent or fails to determine the interest
rate for any Interest Period, we have a duty to appoint the
London office of such other leading commercial bank or
investment bank in New York as may be approved in writing by
the fiscal agent.
The Notes contain provisions regarding future modifications to their
terms (so-called "collective action clauses") that differ from those applicable
to the Republic's outstanding securities which have been previously registered
with the Securities and Exchange Commission and issued pursuant to such
registration. These provisions are described in the section "Description of the
Debt Securities" in the Prospectus. Under these provisions the Republic may
amend payment and other key provisions of the Notes, including the principal
amount and interest rate, with the approval of less than all the holders of the
Notes.
Other Terms
For other terms of the Notes, including the negative pledge covenant
and events of default, see "Description of the Debt Securities" in the
Prospectus.
Notices
All notices regarding the Notes will be published in London in the
Financial Times and in New York in The Wall Street Journal (U.S. Edition). If at
any time publication in any such newspaper is not practicable, notices will be
valid if published in such English language newspaper with general circulation
in the respective market regions as we shall determine. Any such notice shall be
deemed to have been given on the date of such publication or, if published more
than once on different dates, on the first date on which publication is made.
Fiscal Agent
The Agency Agreement will govern the duties of the Agent. The Republic
may maintain deposit accounts and conduct other banking transactions in the
ordinary course of business with the Agent.
Please note that the Fiscal Agent is an agent of the Republic, not a
trustee for the holders of the Notes, and does not have the responsibility or
duty to act for the holders as would a trustee.
Book-Entry System
The Notes will be issued in the form of one or more fully registered
global notes (the "Global Notes") which will be deposited with, or on behalf of,
The Depository Trust Company, New York, New York (the "Depository" or "DTC") and
registered in the name of Cede & Co., the Depository's nominee. Beneficial
interests in the Global Notes will be represented through book-entry accounts of
financial institutions acting on behalf of beneficial owners as direct and
indirect participants in the Depository ("participants"). Investors may elect to
hold interests in the Global Notes through either the Depository (in the United
States) or Euroclear Bank S.A./N.V., as operator of the Euroclear System
("Euroclear") or Clearstream Banking, societe anonyme ("Clearstream,
Luxembourg") (in Europe), if they are participants of such systems, or
indirectly through organizations which are participants in such systems.
Euroclear and Clearstream, Luxembourg will hold interests on behalf of their
participants through customers' securities accounts in Euroclear's and
Clearstream, Luxembourg's names on the books of their respective depositaries
("U.S. Depositaries"), which in turn will hold such interests in customers'
securities accounts in the depositaries' names on the books of the Depository.
Except as set forth below, the Global Notes may be transferred, in whole and not
in part, only to another nominee of the Depository or to a successor of the
Depository or its nominee. Except under circumstances described below, the Notes
will not be issuable in definitive form. The laws of some states require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in the Global Notes.
So long as the Depository or its nominee is the registered owner of
the Global Notes, the Depository or such nominee, as the case may be, will be
considered the sole owner or holder of the Notes represented by the
S-3
Global Notes for all purposes under the Agency Agreement. Except as provided
below, owners of beneficial interests in the Global Notes will not be entitled
to have Notes represented by the Global Notes registered in their names, will
not receive or be entitled to receive physical delivery of Notes in definitive
form and will not be considered the owners or holders thereof under the Agency
Agreement.
Principal and interest payments on Notes registered in the name of the
Depository or its nominee will be made to the Depository or its nominee, as the
case may be, as the registered owner of the Global Notes. None of the Republic,
the Fiscal Agent, or any paying agent or registrar for the Notes will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial interests in the Global Notes or for
maintaining, supervising or reviewing any records relating to such beneficial
interests.
The Republic expects that the Depository for the Notes or its nominee,
upon receipt of any payment of principal or interest, will credit the
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Notes as
shown on the records of the Depository or its nominee. The Republic also expects
that payments by participants to owners of beneficial interests in the Global
Notes held through such participants will be governed by standing instructions
and customary practices, as is now the case with securities held for the
accounts of customers in bearer form or registered in "street name", and will be
the responsibility of such participants.
The Depository advises that it is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section
17A of the Securities Exchange Act of 1934 (the "Exchange Act"). The Depository
holds securities deposited with it by its participants and facilitates the
settlement of transactions among its participants in such securities through
electronic computerized book-entry changes in accounts of the participants,
thereby eliminating the need for physical movement of securities certificates.
The Depository's participants include securities brokers and dealers (including
the underwriters), banks, trust companies, clearing corporations and certain
other organizations, some of which (and/or their representatives) own the
Depository. Access to the Depository's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
According to the Depository, the foregoing information with respect to
the Depository has been provided to the financial community for informational
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
Euroclear advises that it was created in 1968 to hold securities for
its participants ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Euroclear provides various other services, including securities lending
and borrowing and interfaces with domestic markets in several countries.
Euroclear is operated by Euroclear Bank S.A./N.V. (the "Euroclear Operator"),
under contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the underwriters. Indirect access to Euroclear is also available
to other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System, and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Notes held beneficially through
Euroclear will be credited to the cash accounts of Euroclear Participants in
accordance with the Terms and Conditions, to the extent received by Euroclear.
S-4
Euroclear also advises that investors that acquire, hold and transfer
interests in the Notes by book-entry through accounts with the Euroclear
Operator or any other securities intermediary are subject to the laws and
contractual provisions governing their relationship with their intermediary, as
well as the laws and contractual provisions governing the relationship between
such an intermediary and each other intermediary, if any, standing between
themselves and the Global Notes.
Under Belgian law, the Euroclear Operator is required to pass on the
benefits of ownership in any interests in securities on deposit with it (such as
dividends, voting rights and other entitlements) to any person credited with
such interests in securities on its records.
Clearstream, Luxembourg advises that it is incorporated under the laws
of Luxembourg as a professional depositary. Clearstream, Luxembourg holds
securities for its participating organizations ("Clearstream Participants") and
facilitates the clearance and settlement of securities transactions between
Clearstream Participants through electronic book-entry changes in accounts of
Clearstream Participants, thereby eliminating the need for physical movement of
certificates. Clearstream, Luxembourg provides to Clearstream Participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Clearstream, Luxembourg interfaces with domestic markets in several
countries. As a professional depositary, Clearstream, Luxembourg is subject to
regulation by the Luxembourg Monetary Institute. Clearstream Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations and may include the underwriters. Indirect
access to Clearstream, Luxembourg is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Clearstream Participant, either directly or indirectly.
Distributions with respect to the Notes held beneficially through
Clearstream, Luxembourg will be credited to cash accounts of Clearstream
Participants in accordance with its rules and procedures, to the extent received
by Clearstream, Luxembourg.
Individual certificates in respect of Notes will not be issued in
exchange for the Global Notes, except in very limited circumstances. If DTC or
each of Euroclear and Clearstream, Luxembourg notifies the Republic that it is
unwilling or unable to continue as a clearing system in connection with the
Global Notes or, in the case of DTC only, DTC ceases to be a clearing agency
registered under the Exchange Act, and in each case a successor clearing system
is not appointed by the Republic within 90 days after receiving such notice from
Euroclear, Clearstream, Luxembourg or DTC or on becoming aware that DTC is no
longer so registered, the Republic will issue or cause to be issued individual
certificates in registered form on registration of transfer of, or in exchange
for, book-entry interests in the Notes represented by such Global Notes upon
delivery of such Global Notes for cancellation.
Title to book-entry interests in the Notes will pass by book-entry
registration of the transfer within the records of Euroclear, Clearstream,
Luxembourg or DTC, as the case may be, in accordance with their respective
procedures. Book-entry interests in the Notes may be transferred within
Euroclear and within Clearstream, Luxembourg and between Euroclear and
Clearstream, Luxembourg in accordance with procedures established for these
purposes by Euroclear and Clearstream, Luxembourg. Book-entry interests in the
Notes may be transferred within DTC in accordance with procedures established
for this purpose by DTC. Transfers of book-entry interests in the Notes between
Euroclear and Clearstream, Luxembourg and DTC may be effected in accordance with
procedures established for this purpose by Euroclear, Clearstream, Luxembourg
and DTC.
Global Clearance and Settlement Procedures
Initial settlement for the Notes will be made in immediately available
funds. Secondary market trading between DTC participants will occur in the
ordinary way in accordance with Depository rules and will be settled in
immediately available funds using the Depository's Same-Day Funds Settlement
System. Secondary market trading between Euroclear Participants and/or
Clearstream Participants will occur in the ordinary way in accordance with the
applicable rules and operating procedures of Euroclear and Clearstream,
Luxembourg and will be settled using the procedures applicable to conventional
Eurobonds in immediately available funds.
Cross-market transfers between persons holding directly or indirectly
through the Depository on the one hand, and directly or indirectly through
Euroclear or Clearstream Participants, on the other, will be effected in the
Depository in accordance with the Depository rules on behalf of the relevant
European international clearing system in the U.S. Depositary; however, such
cross-market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in such system in
accordance with its rules and
S-5
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its U.S. Depositary to take
action to effect final settlement on its behalf by delivering or receiving Notes
in the Depository, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to the Depository. Euroclear
Participants and Clearstream Participants may not deliver instructions directly
to their respective U.S. Depositaries.
Because of time-zone differences, credits of Notes received in
Euroclear or Clearstream, Luxembourg as a result of a transaction with a DTC
participant will be made during subsequent securities settlement processing and
dated the business day following the Depository settlement date. Such credits or
any transactions in such Notes settled during such proceeding will be reported
to the relevant Euroclear or Clearstream Participants on such business day. Cash
received in Euroclear or Clearstream, Luxembourg as a result of sales of Notes
by or through a Euroclear Participant or a Clearstream Participant to a DTC
Participant will be received with value on the Depository settlement date but
will be available in the relevant Euroclear or Clearstream, Luxembourg cash
account only as of the business day following settlement in the Depository.
Although the Depository, Euroclear and Clearstream, Luxembourg have
agreed to the foregoing procedures in order to facilitate transfers of Notes
among participants of the Depository, Euroclear and Clearstream, Luxembourg,
they are under no obligation to perform or continue to perform such procedures
and such procedures may be changed or discontinued at any time.
Payment of Additional Amounts
All payments made in respect of a Note, including payments of
principal and interest, to a holder of a Note that is not a resident of the
Republic, will be made by the Republic without withholding or deducting for or
on account of present or future taxes, duties, levies or other governmental
charges of whatever nature imposed or levied by the Republic or any political
subdivision or taxing authority within the Republic. In the event the Republic
is required by law to deduct or withhold any such taxes from payments, the
Republic will pay to you such additional amounts as may be necessary so that the
net amount that you receive is equal to the amount provided for in the Note to
be paid to you in the absence of such deduction or withholding. You will not be
paid any additional amounts, however, if the tax is:
o a tax that would not have been imposed but for your present or
former connection (or a connection of your fiduciary, shareholder
or other related party) with the Republic, including your being
or having been a citizen or resident of the Republic or being or
having been engaged in a trade or business or present in the
Republic or having, or having had, a permanent establishment in
the Republic;
o imposed on a payment to you as an individual and is required to
be made pursuant to the European Council Directive 2003/48/EC or
any other directive implementing the conclusions of the EU
Council of Finance Ministers meeting of November 26 and 27, 2000
on the taxation of savings income or any law implementing or
complying with, or introduced in order to conform to, such
Directive;
o imposed because you present a Note for payment more than thirty
(30) days after the date on which the payment became due and
payable;
o an estate, inheritance, gift, sales, transfer or personal
property tax or any similar tax, assessment or governmental
charge;
o a tax, assessment or other governmental charge which is payable
other than by withholding;
o a tax that would not have been imposed but for the failure to
comply with certification, information or other reporting
requirements concerning the your nationality, residence or
identity (or the nationality, residence or identity of the
beneficial owner of the Note), if your compliance is required by
the laws of the Republic or of any political subdivision or
taxing authority of the Republic to avoid or reduce such tax and
if such compliance is not materially more onerous (in form, in
procedure and in the substance of information disclosed) than
comparable information or other reporting requirements imposed
under United States tax law;
o required to be withheld by any paying agent from a payment on the
Note if such payment can be made without such withholding by
another paying agent; or
o imposed as a result of any combination of the items listed above.
S-6
Furthermore, no additional amounts will be paid with respect to any
Note to a holder who is a fiduciary or partnership or other than the sole
beneficial owner of such payment to the extent that the settlor with respect to
such fiduciary, partner or beneficial owner, as the case may be, would not have
been entitled to payment of such additional amounts if they held the Note
themselves.
In the event that such deduction or withholding is required, the
Republic will make such deduction or withholding and remit the full amount
deducted or withheld to the relevant authority in accordance with applicable
law. The Republic will furnish you, upon request, within a reasonable period of
time after the date of the payment of any taxes due pursuant to applicable law,
certified copies of tax receipts evidencing such payment by the Republic.
UNDERWRITING
Subject to the terms and conditions stated in the Underwriting
Agreement dated December 15, 2004, between the Republic and the Underwriters
named below, each such Underwriter has severally agreed to purchase, and the
Republic has agreed to sell to each Underwriter, the principal amount of Notes
set forth opposite the name of that Underwriter.
Underwriters Principal Amount
- --------------------------------------------------------- ------------------
Deutsche Bank Securities Inc.
60 Wall Street, 3rd Floor
New York, New York 10005.............................. $50,000,000
Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London, E14 4QW....................................... $50,000,000
------------------
Total.................................................... $100,000,000
==================
The Underwriting Agreement provides that the obligations of the
several Underwriters to purchase the Notes are subject to approval of certain
legal matters by counsel and to certain other conditions. The Underwriters are
obligated to purchase all the Notes if they purchase any of the Notes.
The Notes are a new issue of securities with no established trading
market. The Republic has not applied for listing of the Notes on any stock
exchange. No assurance can be given as to the liquidity of the trading market
for the Notes.
The Notes are offered for sale in the United States and elsewhere
where such offer and sale is permitted.
Each Underwriter has represented and agreed that (a) it has not
offered or sold, and, prior to the expiration of the period of six months from
the closing date for the Notes, will not offer or sell any Notes to persons in
the United Kingdom, except to those persons whose ordinary activities involve
them in acquiring, holding, managing or disposing of investments (as principal
or agent) for the purpose of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities Regulations
1995, (b) it has complied and will comply with all applicable provisions of the
Financial Services and Markets Act 2000 (the "FSMA"), with respect to anything
done by it in relation to the Notes in, from or otherwise involving the United
Kingdom, and (c) it has only communicated or caused to be communicated and will
only communicate or cause to be communicated any invitation or inducement to
engage in investment activity (within the meaning of section 21 of the FSMA)
received by it in connection with the issue or sale of any Notes in
circumstances in which section 21(1) of the FSMA does not apply to the Issuer.
The Notes will not be offered in the Republic of Hungary in a public
offer nor in a private placement as defined in Hungarian Act No. CXX of 2001 on
the Capital Markets. Each Underwriter confirms its awareness of the
S-7
above, represents that it has not offered or sold and undertakes that it will
not offer or sell the Notes in the Republic of Hungary in a public offer nor in
a private placement and will not offer the Notes for sale to the general public
in the Republic of Hungary.
Purchasers of the Notes may be required to pay stamp taxes and other
charges in accordance with the laws and practices of the country of purchase in
addition to the issue price set forth on the cover page hereof.
It is expected that delivery of the Notes will be made against payment
therefor on or about December 15, 2004, which is the fifth business day
following the date hereof (this settlement cycle is referred to as "T+5").
The Underwriters have agreed to pay certain expenses of the Republic
in connection with the offering.
In connection with the offering, the Underwriters may over-allot, or
engage in syndicate covering transactions, stabilizing transactions and penalty
bids. Over-allotment involves syndicate sales of Notes in excess of the amount
to be purchased by the Underwriters in the offering, which creates a syndicate
short position. Syndicate covering transactions involve purchases of Notes in
the open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of Notes made for the purpose of preventing or retarding a decline in
the market price of Notes while the offering is in progress. Penalty bids permit
the Underwriters to reclaim a selling concession from a syndicate member when
the syndicate repurchases Notes originally sold by that syndicate member in
covering syndicate short positions. These activities may cause the price of the
Notes to be higher than it would otherwise be in the open market in the absence
of such transactions. The Underwriters are not required to engage in these
transactions, and, if commenced, the Underwriters may discontinue them at any
time.
In the ordinary course of their respective businesses, certain of the
Underwriters and their affiliates have in the past and may in the future engage
in investment banking and commercial banking transactions with the Republic.
The Republic has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the U.S. Securities Act of 1933, or to
contribute to payments the Underwriters may be required to make in respect of
any of those liabilities.
GENERAL INFORMATION
The Notes have been assigned Common Code No. 020817780, International
Security Identification Number (ISIN) US445545AB22 and CUSIP No. US 445545AB2.
LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed upon on
behalf of the Republic by the Legal Department of the Government Debt Management
Agency, and by White & Case LLP, New York, New York, special United States
counsel for the Republic. Certain legal matters will be passed upon for the
Underwriters by Cravath, Swaine & Moore LLP, New York, New York, United States
counsel for the Underwriters, and by Dr. Eva Hegedus in association with Allen &
Overy LLP, Budapest, Hungary, Hungarian counsel for the Underwriters. All
statements in this Prospectus Supplement and the Prospectus with respect to
matters of the law of Hungary have been passed upon by the Legal Department of
the Government Debt Management Agency. In rendering their opinions, United
States counsels will rely as to all matters of the law of Hungary upon the
opinions of the Legal Department of the Government Debt Management Agency and
Dr. Eva Hegedus in association with Allen & Overy LLP.
S-8
PROSPECTUS
[National Symbol of Hungary]
Republic of Hungary
We may offer up to U.S. $1,000,000,000 of our debt securities for sale from
time to time based on information contained in this prospectus and various
prospectus supplements. The securities will be direct, unconditional, unsecured
and general obligations of the Republic of Hungary. The securities will rank
equally in right of payment with all other unsecured and unsubordinated
obligations of the Republic of Hungary and will be backed by the full faith and
credit of the Republic of Hungary.
We will provide specific terms of these securities in supplements to this
prospectus. You should read this prospectus and any supplement carefully before
you invest. This prospectus may not be used to make offers or sales of
securities unless accompanied by a supplement.
-----------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------------------------
The date of this prospectus is November 12, 2004
1
This prospectus is part of registration statements that the Republic of
Hungary filed with the Securities and Exchange Commission, or SEC, under a
"shelf" registration process. Under this shelf process, the Republic may sell,
from time to time, any of the debt securities described in this prospectus in
one or more offerings up to a total U.S. dollar equivalent amount of U.S.
$1,000,000,000. This prospectus provides you with basic information about the
Republic of Hungary, or the Republic, and a general description of the debt
securities the Republic may offer. Each time the Republic sells debt securities
under this shelf process, it will provide a prospectus supplement that will
contain updated information about the Republic, if necessary, and specific
information about the terms of that offering. Before you invest, you should read
both this prospectus and any prospectus supplement. References herein to the
prospectus are also to the prospectus supplement.
Any information in this prospectus may be updated or changed in a
prospectus supplement, in which case the more recent information will apply.
Except as otherwise specified, all amounts in this prospectus are expressed
in Hungarian forints ("Ft" or "HUF"), in euro ("Euro" or "EUR"), and in U.S.
dollars ("$" or "USD"). All currency conversions in this prospectus are at the
Hungarian National Bank's 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 forints
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.
---------------------------------------------------------------------
1999 2000 2001 2002 2003
----------- ----------- ----------- ----------- -----------
(HUF per EUR)
Year end .................................. 254.92 264.94 246.33 235.90 262.23
Average for year .......................... 252.80 260.04 256.68 242.97 253.51
- -------------------
Source: National Bank of Hungary
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.
---------------------------------------------------------------------
1999 2000 2001 2002 2003
----------- ----------- ----------- ----------- -----------
(HUF per USD)
Year end .................................. 252.52 284.73 279.03 225.16 207.92
Average for year .......................... 237.31 282.27 289.53 258.00 224.44
- -------------------
Source: National Bank of Hungary
On November 8, 2004, the official (middle) exchange rate was HUF 189.47 =
USD 1.00, HUF 245.54 = EUR 1.00, and EUR 0.7716 = 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 prospectus may differ from the sum of the
individual items in such tables due to rounding. In addition, certain figures
contained in this prospectus 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 prospectus or in any
prospectus supplement hereto.
This prospectus and any prospectus supplements include or may include
forward-looking statements. All statements other than statements of historical
facts included in this prospectus or in a prospectus supplement regarding (among
other things) the Republic's economy, fiscal condition, politics, debt or
prospects, may constitute forward-looking statements. Forward-looking statements
generally can be identified by the use of forward-looking terminology such as
"may", "will", "expect", "intend", "estimate", "anticipate", "believe",
"continue", "could", "should", "would" or similar terminology. Such statements
include, but are not limited to, statements in this prospectus which refer to:
o expected budget for 2004,
2
o estimated future budget deficits,
o future deregulation of prices,
o future privatizations and revenues from them,
o future development of the current account deficit,
o future development and sustainability of health care and pension
systems,
o the Convergence Program, future participation of Hungary in ERM II,
and the future introduction of the Euro as the official Hungarian
currency, and
o expected future payments on public debt.
By their nature, forward-looking statements involve risk and uncertainty,
and other the factors described in the context of such forward-looking
statements could cause actual results and developments to differ materially from
those expressed in or implied by such forward-looking statements. Although the
Republic believes that expectations reflected in its forward-looking statements
are reasonable at this time, there can be no assurance that such expectations
will prove to have been correct.
3
TABLE OF CONTENTS
USE OF PROCEEDS................................................................5
THE REPUBLIC OF HUNGARY........................................................6
General......................................................................6
Political System.............................................................6
Recent Political Developments................................................8
International Relations.....................................................10
THE ECONOMY...................................................................12
Background..................................................................12
Economic Performance........................................................13
Principal Sectors of the Economy............................................18
PRIVATIZATION.................................................................23
Status of Privatization Efforts.............................................23
Methods of Privatization Used...............................................23
BALANCE OF PAYMENTS AND FOREIGN TRADE.........................................24
Balance of Payments.........................................................24
Foreign Trade...............................................................25
Foreign Direct Investment...................................................26
Foreign Exchange Reserves...................................................28
MONETARY AND FINANCIAL SYSTEM.................................................29
National Bank of Hungary....................................................29
Foreign Exchange and Convertibility of the Forint...........................32
The Hungarian Banking System................................................32
Capital Markets.............................................................35
PUBLIC FINANCE................................................................37
General Information.........................................................37
Central Government Budget...................................................40
Social Security and Extra-Budgetary Funds...................................46
Local Government Finance....................................................48
EU net position.............................................................48
Medium Term Fiscal Program and the Convergence Program......................48
HUNGARIAN DEBT................................................................50
General Information.........................................................50
Public Debt.................................................................50
Gross External Debt.........................................................53
Relations with Multilateral Financial Institutions..........................54
DESCRIPTION OF THE DEBT SECURITIES............................................56
General.....................................................................56
Negative Pledge.............................................................57
Governing Law...............................................................57
Fiscal Agent................................................................57
Event of Default; Event of Acceleration.....................................58
Payment of Additional Amounts...............................................58
Meeting of Holders of Debt Securities; Modification.........................59
Representative Committee....................................................61
Global Securities...........................................................61
ENFORCEABILITY OF JUDGMENTS...................................................63
TAXATION......................................................................64
Hungarian Taxation..........................................................64
United States Federal Income Tax Considerations.............................64
European Union Tax Reporting and Withholding................................66
PLAN OF DISTRIBUTION..........................................................67
VALIDITY OF THE SECURITIES....................................................68
AUTHORIZED AGENT IN THE UNITED STATES.........................................68
OFFICIAL STATEMENTS AND DOCUMENTS.............................................68
FURTHER INFORMATION...........................................................68
INDEX TO TABLES AND SUPPLEMENTARY INFORMATION.................................69
4
USE OF PROCEEDS
Unless otherwise indicated in the relevant prospectus supplement, the net
proceeds from each sale of debt securities will be used for general financing
purposes.
5
THE REPUBLIC OF HUNGARY
[Map of Hungary and Europe]
General
The Republic of Hungary (the "Republic" or "Hungary") lies in Central
Europe and covers an area of approximately 93,000 square kilometers. Hungary is
bordered by seven countries: Slovakia and the Ukraine to the north, Romania to
the east, Serbia and Montenegro 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.
The population of Hungary is approximately 10.1 million. Approximately 63%
of the people live in urban areas and approximately 1.9 million live in
Budapest, which is the political, administrative, cultural and commercial centre
of Hungary. While over 97% of the population is Magyar, there are minorities of
Croat, German, Roma, Romanian, Serb and Slovak ethnicity.
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,
6
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. Ferenc Madl, who was elected in 2000. 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:
o Representing the nation as head of state;
o Concluding international treaties and agreements on behalf of the
Republic (agreements that are legislative in character require the
prior consent of the Parliament);
o Safeguarding the democratic operation of the political process;
o Acting as commander-in-chief of the armed forces;
o Setting the date for Parliamentary and local elections;
o Initiating certain measures in Parliament;
o Initiating referenda;
o Appointing and removing, among others, the President and
Vice-Presidents of the National Bank of Hungary; and
o Granting pardons.
Government
The government of Hungary consists of the Prime Minister and other
ministers forming the Cabinet (currently 17 ministers, of which 2 are without
portfolio). The Prime Minister and the government's program are approved by a
simple majority vote of Parliament. The current Prime Minister is Mr. Ferenc
Gyurcsany, who was elected by the Parliament on September 29, 2004, following
the resignation of his predecessor, Mr. Peter Medgyessy, on August 25, 2004 (who
was in office since the last parliamentary elections held in 2002). See "The
Republic of Hungary - Recent Political Developments." 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.
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.
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). Parliamentary elections
were last held in April 2002 and the next elections are scheduled to take place
in 2006.
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, Pecs and Szeged were established with
regional jurisdiction from July 1, 2003 and began their operations at that time.
Two further Courts of Appeal were established in July 2004 and will start
operation in 2005. The Supreme Court sets guidelines for the judicial process of
every court. Resolutions concerning uniformity are binding on all courts. Judges
are independent and are subordinate only to the
7
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 as 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 less experienced than their Western
European counterparts in areas such as securities, banking and commercial law.
Parties often refer these matters to the arbitration court 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, in 1995, the Parliament
elected three commissioners (also known as Ombudsmen), the Parliamentary
Commissioner for Civil Rights, the Parliamentary Commissioner for Data
Protection and Freedom of Information, and the Parliamentary Commissioner for
the National and Ethnic Minorities Rights. Their principal role is to help
people defend their rights vis-a-vis public administration. The Commissioners
are elected for a period of six years and are exclusively responsible to the
Parliament.
Anybody 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 rights or that such
violation is imminent, may apply to these Parliamentary Commissioners to help
protect his rights. The integration of tasks and functions of the Data
Protection Commissioner constitutes a unique solution. In addition to monitoring
and supervising data protection and freedom of information in general and
exercising the competence of an ombudsman in the relevant area, this
Parliamentary 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.
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 2002.
Recent Political Developments
No single party won a majority of Parliamentary seats in the last elections
held in April 2002. The Hungarian Socialist Party ("HSP") and the center-left
Alliance of Free Democrats ("AFD") were able to form a coalition government with
198 of the 386 parliamentary mandates. After the 2002 parliamentary elections,
Mr. Peter Medgyessy (serving as the Minister of Finance in the previous
Socialist government, which was in power from 1994 to 1998) became the Prime
Minister and formed the government in May 2002. The relationship between the two
coalition partners is not set forth in a formal coalition agreement, but the
Program of the Government and the distribution of ministerial portfolios reflect
a carefully negotiated coalition structure.
On August 25, 2004, Mr. Peter Medgyessy handed in his resignation to
President Ferenc Madl, but remained in office until September 29, 2004 when the
Parliament elected Mr. Ferenc Gyurcsany as the new Prime Minister. Mr. Ferenc
Gyurcsany served as the Minister for Child, Youth and Sports Affairs in the
previous government led by Mr. Peter Medgyessy and was nominated to his current
position by HSP, the leading coalition party.
8
The following table shows the political affiliations of the Hungarian
members of the Parliament after the election in April 2002:
Composition of Parliament
Number of Share of
Seats Seats
--------------- --------------
(%)
Alliance of Free Democrats(1) ................ 20 5.18
Fidesz - Hungarian Civic Party................ 164 42.49
Hungarian Democratic Forum.................... 23 5.96
Hungarian Socialist Party(1).................. 177 45.85
HSP/AFD Joint Candidate(1).................... 1 0.26
Independent Representatives................... 1 0.26
--------------- --------------
Total ........................................ 386 100.0
=============== ==============
- ---------------------------
Source: National Election Office
Notes: (1) Member of the new coalition government
Local government elections
The following table shows the results of the latest local government
elections, which were held in October 2002:
Local Government Elections Results
Budapest Country government Municipalities
------------------- -------------------- -------------------
(percentage of total vote)
HSP - AFD........................................ 58.75 45.61 51.65
Fidesz - Hungarian Civil Party................... 31.25 33.36 33.78
Other 10.00 21.03 14.57
------------------- -------------------- -------------------
Total 100.0 100.0 100.0
=================== ==================== ===================
- ---------------------------
Source: National Election Office
European Parliament Elections
The first elections to the European Parliament were held on June 13, 2004.
This table shows the political affiliations of the Hungarian members of the
European Parliament after the election:
Seats in European Parliament
Seats
------------
FIDESZ - Hungarian Civil Party............................... 12
Hungarian Democratic Forum................................... 1
HSP ....................................................... 9
AFD ....................................................... 2
- ---------------------------
Source: European Parliament
9
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 considered to be a decisive step towards integrating with the
developed nations and to 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 besides the above mentioned UN, OECD, NATO and EU, Hungary is a
member of a number of other international organizations, including the Global
Environment Protection Fund, World Trade Organization ("WTO"), the International
Bank for Reconstruction and Development ("IBRD", "World Bank"), the Conference
on Security and Co-operation in Europe, the International Monetary Fund ("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"), 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"), the European Free Trade Association ("EFTA") 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. This initiative
mainly addresses issues of regional infrastructure development. Hungary has been
a member of the Conference on Security and Cooperation in Europe (now existing
as the Organization for Security and Cooperation 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: Szabolcs Fazakas (Hungarian
Socialist Party) is the Chairman of the European Committee on Budgetary Control
(BUDG), Pal Schmitt (European People's Party-European Democrats) is the
Vice-chairman of the Committee on Culture and Sport (CULT), Zita Gurmai
(Hungarian Socialist Party) assumed the position of the Vice-chairwoman of the
Committee on Women's Rights and Equal Opportunities (FEEM), and Katalin Levai
(Hungarian Socialist Party) became the Vice-chairwoman of the Committee on Civil
Liberties, Justice and Home Affairs. Furthermore, Jozsef Szajer and Magda Kosane
Kovacs 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 of the European Commission.
The implementation of the Schengen System was a crucial issue in the
accession negotiations. Hungary plans to become fully integrated into the system
by 2006. The configuration of an information network compatible with the
Schengen Information System (SIS-II), a principal precondition to integration
into Schengen System, should be completed by the end of this year.
The Hungarian position on the European Constitution was expressed by the
ex-Prime Minister Peter Medgyessy, who evaluated the agreement as a success. The
Republic of Hungary proposed a clause relating to the protection of minorities,
which was incorporated in the Preamble. Under Hungarian legislation, the
adoption of the European Constitution does not require a referendum and no major
parliamentary party openly opposes parliamentary approval of the European
Constitution.
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
is the National Development Plan, which was approved on December 19, 2002 and
which oversees the allocation of EU funds from 2004 to 2006. The National
Development Plan consists of five operative programs:
o human resources development;
o economic competitiveness;
o agricultural and rural development;
o environment and infrastructure; and
o regional development.
10
By entering the EU, Hungary also became a member of the European Investment
Bank. For information about the Republic's strategy as regards its participation
in the Exchange Rate Mechanism, see "Public Finance - Medium Term Fiscal Program
and the Convergence Program".
11
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 1990s 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:
o an ambitious privatization program - the vast majority of Hungary's
large state-owned enterprises have already been privatized. See
"Privatization";
o 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; now three-quarters of
Hungarian exports are to EU markets, and Hungary's market share in the
EU has more than doubled since the mid-1990s. See "Balance of Payments
and Foreign Trade - Foreign Trade";
o 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 57% in 2003
(calculated according to Government Finance Statistics ("GFS")
methodology; according to the European System of Accounts 95 ("ESA
95"), the ratio of the public sector debt to GDP was 59.1% in 2003).
See "Hungarian Debt";
o the GDP growth trends are in line with general European trends: the
rate was 5.2% in 2000, 3.8% in 2001, 3.3% in 2002, 2.9% in 2003, and
3.9% in the first three quarters of 2004 which is still significantly
higher than the EU average. See "The Economy - Economic Performance -
Gross Domestic Product";
o inflation, caused initially by price deregulation, declined from 28.3%
as of the end of 1995 to 5.7% as of the end of 2003. The inflation
rate has recently increased, up to 6.6% as of September 30, 2004,
largely due to one-time VAT increases. See "The Economy - Economic
Performance - Inflation";
o real wages were generally declining or stagnant until 1997, as
inflation outpaced nominal wage increases; real wage increases were
moderate between 1998 and 2000 as the economy expanded and inflation
decreased: additional expenditure on public sector workers after the
2002 election increased real wage growth to 13.1% in 2002, but there
was a decrease in the pace of growth of the real wage in 2003, and
2004. See "The Economy - Economic Performance - Wages";
o unemployment has generally declined from its peak of 12.5% in the
first quarter of 1993 to 5.9% in August 2004. See "The Economy -
Economic Performance - Employment"; and
o high levels of foreign direct investment with the level of cumulative
foreign direct investment in 2003 reaching Euro 37 billion, about 50%
of GDP for 2003. See "Balance of Payments and Foreign Trade - Foreign
Direct Investment".
12
Economic Performance
The following table sets out certain macroeconomic statistics regarding the
Republic of Hungary for the five years ended 2003:
Selected Macroeconomic Statistics
1999 2000 2001 2002 2003(1)
--------- --------- -------- --------- -----------
Economic Data
Nominal GDP (HUF billions)......................... 11,393.5 13,172.3 14,849.8 16,740.4 18,574.0*
Real GDP (growth in %)............................. 4.2 5.2 3.8 3.5 2.9*
Real exports (growth in %)......................... 12.2 21 7.8 3.7 7.2*
Real imports (growth in %)......................... 13.3 19.4 5.1 6.2 10.3*
Rate of unemployment (as at the year end (%)) ..... 7.0 6.4 5.7 5.9 l5.9
Consumer prices (growth in %)...................... 10.0 9.8 9.2 5.3 l4.8
Producer prices (growth in %)...................... 5.1 11.7 5.2 (1.8) l2.4
State Budget; Public and External Debt
State budget surplus (HUF billions)(2)............. (424.1) (480.2) (444.0) (1,673.7) (1,094.5)
as a % of GDP .................................. 3.7 3.7 3.0 9.9 5.9*
Total revenues (HUF billions)...................... 4,926.2 5,568.1 6,325.7 6,817.8 10,211.0
as a % of GDP .................................. 43.2 42.3 42.6 40.7 54.9*
State debt (HUF billions), unconsolidated.......... 6,886.4 7,226.2 7,719.5 9,224.2 10,587.7*
as a % of GDP .................................. 60.4 54.9 52.0 55.1 57.0*
General government debt, after consolidation (HUF
billions) ...................................... 6,977.0 7,299.5 7,951.2 9,561.9 10,968.1*
as a % of GDP .................................. 61.2 55.4 53.5 57.1 59.1*
Gross external debt (HUF billions) ................ 2,536.2 2,508.8 2,322.1 2,267.3 2,579.0*
as a % of GDP .................................. 22.26 19.05 15.64 13.54 13.88*
Balance of Payments Data(3)
Current account (USD billions)..................... (3.8) (4.0) (3.2) (4.7) (7.4)*
as a % of GDP .................................. (7.8) (8.7) (6.3) (7.1) (8.9)*
Exports (USD billions)............................. 30.8 34.3 37.7 41.7 51.2*
Imports (USD billions)............................. 32.1 36.2 38.5 43.2 54.8*
Central bank's foreign exchange reserves (USD
billions)....................................... 10.6 10.9 10.3 9.7 12.0
- ---------------------------
Source: Hungarian Central Statistical Office, National Bank of Hungary, Ministry
of Finance
Notes: (1) For 2003, we present the latest available data. Items with asterisk
are preliminary data, items without asterisk are final data. For further
discussion, see "Public Finance - General Information - Methodology".
(2) Local governments are not included.
(3) The National Bank of Hungary does not publish Balance of Payments
data in USD. The amounts are converted into USD using the monthly HUF
data and the respective monthly average HUF/USD exchange rates,
calculated by the National Bank of Hungary.
13
Gross Domestic Product ("GDP")
The following table presents the components of nominal GDP and related
figures by expenditures at current market prices, as well as real GDP growth
rates, per capita GDP, and US dollar equivalents, for the years indicated:
Gross Domestic Product
As at and for the year ended December 31,
------------------------------------------------------------------
1999 2000 2001 2002 2003
------------ ----------- ------------ ----------- ------------
(HUF billion, except as indicated)
GDP.......................................... 11,393 13,172 14,850 16,740 18,574
Annual real GDP growth rate (%)............. 4.2 5.2 3.8 3.5 2.9
Per capita GDP (in HUF)..................... 1,112,915 1,290,014 1,457,621 1,648,227 1,834,012
US Dollar Equivalents:
GDP (USD billion)........................... 48.0 46.7 51.8 64.9 82.8
Per capita GDP (USD)........................ 4,692 4,571 5,087 6,388 8,176
- ---------------------------
Source: Hungarian Central Statistical Office
Although economic growth has been decreasing since 2000, the rate of
real GDP growth in Hungary in each of the years 2001, 2002 and 2003, was higher
than the average growth recorded in the European Union. From 2001, the growth
was attributable mainly to exports and, especially in 2002 and 2003, to domestic
consumption. The growth performance in 2003 was driven mainly by household
consumption which increased by 6.5%. The increase in domestic consumption was
supported by budget expenditures and government measures (e.g., increasing the
minimum salary, increased mortgage subsidies and public sector wage increase).
The structure of economic growth has improved since the second half of 2003 as
the growth in export and investments has accelerated and the consumption growth
has decelerated. In order to support the development of a sustainable growth
structure, the government applied a restrictive income and fiscal policy in
2004. See "Public Finance - Budget Trends". In the first three quarters of 2004,
GDP growth reached 3.9% and the positive trend in the growth structure,
commenced in the second half of 2003, continued. The growth rate of household
consumption decelerated to 3.9% whereas investments in manufacturing increased
by 25% in the first six month of 2004, compared to the same period in 2003. The
export of goods has been steadily increasing since July 2003 and rose by 18% in
the first half of 2004, compared to the same period in 2003.
The following table illustrates the final use of gross domestic product in
each of the years 1999 through 2003:
Use of Gross Domestic Product
1999 2000 2001 2002 2003
-------- -------- -------- -------- ---------
(the corresponding period of previous year=100)
Total consumption................................... 104.3 104.4 105.8 108.7 105.9
- of which:
Household consumption............................ 104.8 105.0 105.9 109.3 106.5
Government consumption........................... 101.8 101.2 105.3 104.8 101.9
Gross capital formation............................. 106.8 105.6 92.7 96.5 104.2
- of which gross fixed capital formation......... 105.9 107.7 105.0 108.0 103.0
Domestic use........................................ 105.1 104.8 101.9 105.4 105.5
Exports............................................. 112.2 121.0 107.8 103.7 107.2
Imports............................................. 113.3 119.4 105.1 106.2 110.3
- ---------------------------
Source: Hungarian Central Statistical Office
14
The following table indicates the sector composition of GDP in each of the
years 1999 through 2003:
Sector Composition of GDP
Year ended December 31,
--------------------------------------------------
1999 2000 2001 2002 2003
---------- --------- --------- -------- --------
(percentage of contribution)
Agriculture, forestry and fishing........................... 4.8 4.3 5.1 4.3 3.9
Mining and quarrying, manufacturing and electricity......... 27.4 27.8 26.9 26.4 26.5
- of which manufacturing................................. 23.4 24.0 23.6 23.6 23.7
Construction................................................ 4.6 5.2 5.2 5.7 5.6
Services, total............................................. 63.2 62.7 62.8 63.6 64.0
- of which:
Trade, repair, hotels and restaurants.................... 13.1 12.5 12.7 13.1 13.3
Transport, storage and communication..................... 8.8 8.5 8.5 8.4 8.3
Financial intermediation and real estate activities...... 20.2 20.9 21.0 21.6 21.9
Public administration, education, health and social
services................................................. 17.8 17.6 17.4 17.2 17.3
Other community, social and personal service activities.. 3.3 3.2 3.2 3.3 3.3
---------- --------- --------- -------- --------
GDP, total.................................................. 100.0 100.0 100.0 100.0 100.0
========== ========= ========= ======== ========
- ---------------------------
Source: Hungarian Central Statistical Office
Note: Indirect taxes and FISIM (Financial Intermediate Services Indirectly
Measured) 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 1999 through 2003:
Inflation
As at and for the year ended December 31,
------------------------------------------------------
1999 2000 2001 2002 2003
------------------------------------------------------
(%)
CPI (yearly average)..................................... 10 9.8 9.2 5.3 4.8
CPI (year-on-year)....................................... 11.2 10.1 6.8 4.8 5.7
PPI (yearly average)..................................... 5.1 11.7 5.2 (1.8) 2.4
PPI (year-on-year)....................................... 7.1 12.4 (0.4) (1.3) 6.2
- ---------------------------
Source: Hungarian Central Statistical Office
Deregulation since 1990 has historically led to a high rate of inflation in
Hungary. This rate has remained relatively high compared to rates in Western
Europe due to the general phasing out of price supports and the high public
sector deficit, but has decreased sharply as a consequence of the new monetary
regime introduced in May 2001.
Consumer prices increased by an average annual inflation rate of 5.3% in
2002, compared to 9.2% in 2001. This reduction in inflation was mainly caused by
the significant appreciation of the Hungarian forint during 2001 and 2002 and
supplemented by factors such as favorable food prices and delays to increases in
regulated prices. In May 2003, the CPI, at 3.6%, was at its lowest level for 22
years, but disinflation came to a halt due to the depreciation of the forint,
the increases in regulated prices and oil prices and changes in relation to VAT
and excise duties (i.e., increases in tax rates and the application of higher
VAT rates to many products and services which had been subject to the reduced
VAT rate). As a result, twelve-month inflation increased significantly in the
first half of 2004. In May 2004, the consumer price index (CPI) and the constant
tax rate index (the "CTI"), which eliminates the impact of changes of the most
important indirect taxes (VAT, consumption taxes, excise duties, registration
taxes for new motor cars) from the CPI, jumped to 7.6% (compared to 3.6% in May
2003) and to 5.4%, respectively. In May 2004, the increase in the CTI index was
mainly due to the growth in consumer prices of services and those
15
of electricity, gas and other fuels. Otherwise, the CTI stagnated during the
first five months of 2004. The CPI was 6.6% in September 2004.
The following table illustrates the annual index changes (year-on-year) in
consumer prices for each of the years 1999 through 2003 and the results for the
first half of 2004:
CPI - Selected Product Groups
As at December 31, As at June
------------------------------------------------------- 30,
1999 2000 2001 2002 2003 2004
----------- --------- --------- --------- --------- -------------
(year-on-year index)
Food................................... 105.7 112.4 109.5 103.6 104.8 107.8
Alcoholic beverages, tobacco........... 110.6 111.3 110.3 111.8 109.8 110.9
Clothing, footwear..................... 107.9 105.6 104.8 103.3 104.3 104.3
Consumer durable goods................. 104.0 101.3 99.3 98.8 98.8 100.0
Electricity, gas and other fuels....... 108.2 112.7 107.5 103.0 111.5 116.9
Other goods incl. motor fuels and
lubricants.......................... 121.4 109.1 102.1 105.7 103.1 104.4
Services............................... 113.7 110.6 108.4 105.5 106.7 107.6
----------- --------- --------- --------- --------- -------------
Total 111.2 110.1 106.8 104.8 105.7 107.5
=========== ========= ========= ========= ========= =============
- ---------------------------
Source: Hungarian Central Statistical Office
Price Regulation
As at the end of 2003, approximately 80% of all prices in Hungary were
unregulated.
The following prices remain regulated:
o Electricity
o Gas
o Heating oil
o Various pharmaceutical products
o Meals at schools, kindergartens, nurseries
o State lottery
o Local and long distance passenger transport
o State owned housing rent
o Various household utilities (including water and sewage charges,
refuse collection service)
o Postal services
In 2003, regulated prices increased by an average of 5.4%, although the
index of regulated prices was continuously increasing over 2003 and it reached
12.7 % in March 2004. This was due to the fact that many previously scheduled
increases in regulated prices were postponed until 2003, thus creating
inflationary pressures in 2003 and 2004. Since March 2004 the index of regulated
prices has been diminishing and reached 7.7% in September 2004.
In line with relevant EU directives, the Republic intends to remove
regulated pricing schemes from the increasingly market-based energy and postal
sectors. The currently proposed schedule for deregulation in energy sector is
2004 (excluding household consumption), and 2007 for the rest of the sector. The
proposed deadline for deregulation in the postal services is 2007 for mail
services, and 2009 for the whole sector.
16
Wages
The following table illustrates recent wage trends:
Wages
As at the year ended December 31,
-------------------------------------------------------------------------------
1999 2000 2001 2002 2003
--------------- --------------- ------------- -------------- ---------------
(previous year = 100)
Nominal wage index............. 112.7 111.4 116.2 119.5 114.8
Real wage index................ 102.4 101.5 106.4 113.5 109.7
- ---------------------------
Source: Hungarian Central Statistical Office
Real wages grew significantly in 2002 and also in 2003, although at a
decreasing pace. In 2002, the high real wage growth was primarily due to a
one-time increase of salaries in the public sector (by 50%), which also
influenced the private sector in 2002 and 2003. The minimum monthly salary level
was increased from HUF 25,000 in 2000 to HUF 50,000 in 2002. Salaries in public
education and the health care sector were raised by 50% in September 2002. The
minimum wage was set to HUF 53,000 in 2003. The real wage index fell to 100.3%
in the first half of 2004, compared to the same period in 2003.
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. Hungary's
incentive policies (mainly consisting of the promotion of investment in less
developed regions, development of transport infrastructure and development of
human resources), also utilizing 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
1999 2000 2001 2002 2003
----------- ----------- ----------- ----------- ------------
(Annual Average, %)
Employed........................................ 49.4 49.6 49.8 49.9 50.6
Unemployed...................................... 3.7 3.4 3.0 3.1 3.2
Unemployment rate(1)............................ 7.0 6.4 5.7 5.9 5.9
- ---------------------------
Source: Hungarian Central Statistical Office
Notes: (1) Based on international sampling methodology using the
recommendations of the International Labor Organization.
The average unemployment rate in August 2004 was 5.9%, which is
considerably lower than the average number calculated for all 25 EU countries
for the same period (9%). Labor unions have not gained any significant influence
in Hungary and to date have not caused any substantial work stoppages. Labor
unions are generally stronger in the public sectors of the economy.
17
The following table illustrates the general composition of employment in
Hungary by major sector for each of the years from 1999 to 2003:
Composition of Employment by Sector
As at the year ended December 31,
------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
(in thousand persons)
Agriculture, hunting, forestry and fishing, related service
activities...................................................... 143.7 132.7 121.3 112.4 107.6
Mining and quarrying............................................... n/a n/a n/a 6.1 6.0
Manufacturing...................................................... 743 765.3 759.8 748.8 734.7
Electricity, gas and water supply.................................. 78.2 72.8 67.2 62.8 61.0
Industry total..................................................... 829.8 844.9 832.8 817.7 801.8
Construction....................................................... 107.3 116.4 117.6 121.4 123.7
Trade, repair of motor vehicles, and personal and household goods.. 267.4 286.2 299.5 303.9 313.1
Hotels and restaurants............................................. 74 77.5 77.7 78.2 80.1
Transport, storage and communication............................... 226.4 228.0 226.4 227.6 223.8
Financial intermediation........................................... 57.1 54.1 51.6 52.9 53.7
Real estate, renting and business activities....................... 135.1 146.6 162.0 163.2 174.7
Public administration and defense, compulsory social security...... 304.4 300.8 302.6 309.6 320.9
Education.......................................................... 248.6 247.1 247.1 249.2 252.9
Health and social work............................................. 209.8 208.4 207.8 214.4 222.7
Other community, social and personal service activities............ 75 75.4 74.4 75.6 77.8
------- ------- ------- ------- -------
National economy, total............................................ 2,678.7 2,718.1 2,720.8 2,726.1 2,752.8
======= ======= ======= ======= =======
- of which:
Enterprise...................................................... 1,846 1,891.1 1,891.7 1,879.7 1,884.6
Government...................................................... 800.7 791.4 788.6 800.5 818.7
- ---------------------------
Source: Hungarian Central Statistical Office
Principal Sectors of the Economy
Industry
The following table indicates the gross production indices by industry
sector in each of the years 1999 through 2003:
Gross Production Indices by Industry
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
(previous year = 100)
Agriculture, forestry and fishing........................... 100.9 92.1 123.4 87.9 93.6
Mining and quarrying, manufacturing and electricity......... 107.2 109.6 100.4 101.3 103.2
- of which manufacturing................................. 108.3 111.0 102.4 103.0 103.4
Construction................................................ 104.3 106.9 105.2 112.9 99.8
Services, total............................................. 103.2 104.0 104.3 104.4 103.4
- of which:
Trade, repair, hotels and restaurants.................... 100.6 102.0 105.9 106.7 104.3
Transport, storage and communication..................... 105.5 102.3 103.6 101.6 101.4
Financial intermediation and real estate activities...... 103.8 107.8 104.4 106.3 104.0
Public administration, education, health and social
service.................................................. 102.8 103.7 103.1 102.1 102.9
Other community, social and personal service activities.. 106.4 96.7 105.0 103.3 103.6
---------- --------- --------- -------- --------
GDP, total.................................................. 104.2 105.2 103.8 103.5 102.9
========== ========= ========= ======== ========
- ---------------------------
Source: Hungarian Central Statistical Office
General. In industry the moderate growth rates of the past years (3.1% in
2001 then 2.8% in 2002) were followed by an upswing (6.3%) in 2003. The volume
of production was higher by 9.5% in the first seven months of
18
2004 than in the same period of the previous year. The acceleration was due
mainly to the strong growth in export sales. More than half of total industrial
production was exported. Industrial export sales increased by 10.3% in 2003,
compared to 3.7% in 2002 and grew by approximately 20% in the first seven months
of 2004, compared to the same period in the previous year. Approximately
two-thirds of total industrial exports are attributable to the following two
segments: manufacture of electrical and optical equipment, and manufacture of
transport equipment. Both segments recorded high growth in 2003 (the former
16.8%, the latter 13.9%).
Productivity in total industrial production increased by 8.8% in 2003
compared to 5.1% in 2002.
Mining and Quarrying. Hungary has small mineral resources, mainly
consisting of building materials (such as sand, pebbles, building stone, cement
and ceramic raw material). As of January 2003, Hungary had 10,614 million tons
of hard coal reserves. Mining and quarrying accounted for only 0.4% of GDP in
2002 and 2003 and the sector has continued to decline since 2000 (by
approximately 8% up to 2003). As of July 2004, the volume of mining and
quarrying recorded an increase of 19.2%, compared to the same month in 2003.
Manufacturing. In 2003, the manufacturing output (representing more than
88% of industrial production) grew by 7%, compared to 3.6% in 2002 and 4.9% in
2001. During the first seven months of 2004 the manufacturing output increased
by 10.9%, compared to the same period in 2003. In 2003, export sales accounted
for more than 60% of the total sales of manufacturing products and were higher
by 11.3% compared to 2002. In the first seven months of 2004, export sales of
manufacturing products grew by 18.5%, compared to the same period in 2003.
Electrical and Optical Equipment. In 2003, the production of electrical and
optical equipment represented more than a quarter of the total manufacturing
production and was the fastest growing manufacturing sub-segment, growing by
16.3%. In 2003, export sales from the production of electrical and optical
equipment accounted for more than 40% of total manufacturing exports
(representing the largest share among all manufacturing sub-segments) and were
higher by 16.8%, compared to 2002.
During the first seven months of 2004 the output increased by 28.4%,
compared to the same period in 2003. An above-average demand for TV and radio
receivers, sound and video players and recorders, office machines and computers
contributed to the good results of this sub-segment.
Transport Equipment. In 2003, the manufacture of transport equipment
increased by 13.5%, due to favorable export conditions prevailing throughout the
year. Export sales in this sub-segment increased by 13.9% in 2003, compared to a
stagnation (0.5% growth) in 2002. During the first seven months, the volume of
transport equipment grew by 9.7% compared to the same months in 2003.
Oil. In 2003, the gross value of manufacture of coke, refined petroleum
products, and nuclear fuel reached HUF 498.8 billion. In the same period, the
gross output and the total sales of the extraction of crude petroleum and
natural gas, service activities incidental to oil and gas extraction excluding
surveying stagnated, compared to 2002 (1.1% and 0.8% growth respectively), while
domestic sales grew by 18.7% and exports fell by 81%. The gross output of
manufacture of refined petroleum products decreased by 10.1%, the total sales by
9.8%, domestic sales by 10.6% and exports by 7.8%. During the first seven months
of 2004, the gross output of extraction of crude petroleum and natural gas,
service activities incidental to oil and gas extraction excluding surveying,
decreased by 13.5%, total sales by 3.2% and domestic sales by 4%, and exports
grew by 9.2%, compared to the same period in 2003, meanwhile the gross output of
manufacture of refined petroleum products grew by 11.6%, total sales by 8.4%,
domestic sales by 8.7%, and exports of refined petroleum products by 7.5%.
Energy, gas and water supply. Approximately 36% of Hungary's total energy
demand is supplied by domestic energy sources. About 83% of coal consumption,
20% of oil consumption, and 21% of natural gas consumption is produced
domestically. The remainder of the consumption of these commodities is imported
mainly from Russia. Domestic power plants supply approximately 90% of Hungarian
electric energy consumption, with the remaining portion being imported primarily
from the Ukraine.
Hungary has consistently worked to diversify its sources of energy and to
build up reserves to dampen the potential negative effects of energy supply
disruptions. Hungary is currently maintaining at least a 12-week supply of oil
in compliance with OECD requirements.
By the end of 1998, all of Hungary's natural gas distribution companies,
six electricity distribution companies and all but two power generation
companies had been privatized. The Ministry of the Economy and Transport is
aiming at the formation of a competitive electricity market and full
liberalization of the sector, in accordance with EU Directives.
19
In 2003, energy demand in Hungary increased by 3.2% because of the
extremely cold weather and the increasing energy demand of the industry.
Approximately 65% of the energy demand was covered by imports, which is 7.5%
more than in the previous year. The electricity and gas markets were both opened
on January 1, 2003.
The following table provides information about the composition of
consumption of the main energy resources in Hungary in each of the years 1999
through 2003:
Composition of Consumption of Energy Resources
As at the year ended December 31,
------------- --------- ---------- ---------- -----------
1999 2000 2001 2002 2003
------------- --------- ---------- ---------- -----------
(%)
Coal..................................... 14.3 13.9 13.4 12.3 12.5
Hydrocarbon.............................. 70.3 68.6 69.5 70.2 70.6
- of which:
Crude oil and petroleum products...... 33.2 32.1 31.5 30.4 28.4
Natural gas........................... 37.1 36.5 38.0 39.8 42.2
Other resources.......................... 15.4 17.7 17.4 17.5 16.9
------------- --------- ---------- ---------- -----------
Total.................................... 100.0 100.0 100.0 100.0 100.0
============= ========= ========== ========== ===========
- of which:
Domestic.............................. 42.1 40.7 39.7 37.4 36.3
Imports............................... 57.9 59.3 60.3 62.6 63.7
- ---------------------------
Source: Hungarian Central Statistical Office
Construction
The output of construction stagnated in 2003 (0.7% growth), in contrast
with the strong growth in 2002 (17.8%), mainly as a result of exceptionally weak
activity in the first quarter of the year. In the last two quarters of 2003, the
output of construction was on the rise again. The construction for the first
half of 2004 increased by almost 8% compared to the same period in 2003.
Service Industries
The gross value added by services increased, on average, by almost 4%
annually between 1999 and 2003. The expansion of this sector, representing more
than two-thirds of GDP, is balanced compared to the industrial sector. During
this period, the output of financial intermediation and real estate activities
grew at the highest rate within the services sector. The weight of this
sub-segment in services has exceeded 30% since 1999. The second most important
segment is that of trade, repair, hotels and restaurants, which represents
approximately 20% of gross value added by services.
In the first quarter of 2004, gross value added by services expanded by
3.2%, compared to the corresponding period for the previous year. The fastest
growth was recorded in the category of hotels and restaurants (5.8%) and
transport, storage and communications (5.4%).
20
The following table shows the composition of the service industry per
individual sub-sectors in each of the years 1999 through 2003:
Composition of Service Industry per Sub-sectors
As at the year ended December 31,
-------- -------- -------- -------- --------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
(%)
Trade, repair, hotels and
restaurants............................... 20.7 19.9 20.2 20.6 20.8
Transport, storage and
communication............................. 13.9 13.6 13.6 13.2 12.9
Financial intermediation and real estate
activities................................ 32.0 33.3 33.4 34.0 34.2
Public administration, education, health
and social services....................... 28.2 28.0 27.7 27.1 27.0
Other community, social and personal
service activities........................ 5.2 5.1 5.2 5.1 5.1
-------- -------- -------- -------- --------
Service, Total............................... 100.0 100.0 100.0 100.0 100.0
======== ======== ======== ======== ========
- ---------------------------
Source: Hungarian Central Statistical Office
Agriculture
In 2003 agriculture closed an unfavorable year, mainly because of the
droughty weather. The quantity of harvested cereals lagged by 26% behind the
previous year's levels, and by 27% behind the average for the years 1996-2000.
Among the cereals, two main crops suffered the greatest loss, with a 25% drop in
the average yield of wheat and 22% of that of maize. According to preliminary
estimates from the Ministry of Agriculture, the grain yield in 2004 is expected
to be approximately 15 million tons, compared to 6 million in 2003, which is
mainly due to the favorable weather conditions prevailing in 2004.
On August 1, 2004 the number of cattle stood at approximately 728,000, and
the total pig population was approximately 4,382,000.
Infrastructure
Hungary is a landlocked country and stands at the cross-roads of several
important transport corridors. Three main road corridors forming part of the
Trans - European Network, three corridor branches and also 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-East Europe towards the West and the East. However, compared to Western
European countries, the transport network in Hungary is relatively less
developed, suffering from the shortage of river bridges, lack of transversal
connections, poor technical parameters and low proportion of expressways.
The length of the national road network is 30,536 km; the total length of
the motorways is 542 km. The density of the road network, compared with the
total number of roads, is 1.46 km/km2, which is 88% of the EU average. The
density of motorways is one fourth of the EU average. A total of 466 km road
sections have been marked out as the most urgent, within in the framework of the
`National Road Rehabilitation Program'.
The railway network coverage is 83 km per 1,000 km2, which is favorable
compared with EU figures (65 km per 1,000 km2). Approximately 16% of the railway
lines are multi-track and 34% of them are electrified.
Recent increases in market shares were made possible by the track
reconstruction work started in the last decade, the development of up-to-date
safety devices, the modernization of the traffic control system, the
electrification of the main line network, and the upgrading of rolling stock on
the intercity routes. Within the framework of the railway development program,
the Slovenian-Hungarian railway connection was constructed in 2001, co-financed
from EU funds - PHARE (Poland and Hungary Aid For The Reconstruction of The
Economy). In 2000-2002, four new major projects were launched to modernize the
lines of the Helsinki railway corridors, with considerable support from EU funds
- - ISPA (Instrument For Structural Policy For Pre-Accession ). Since the
beginning of the 1990's air transport has been marked by dynamic increases.
Passenger transport increased by 56%, air freight by 79% and the traffic in
Hungarian air space increased by 273% between 1994 and 2001.
21
The country has one international airport that can meet the present traffic
level. In line with international trends the traffic at Ferihegy International
Airport in Budapest is increasing.
Navigation is possible along 1600 km of the rivers in Hungary. There is
commercial navigation on the river Danube and, to a very small extent, on the
river Tisza. In 2001, the share of water transport was 3.4% (2.9 million tons),
calculated in freight ton-km, which is low compared with other EU member states
bordering the Danube.
The telecommunication 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-communication services market is not up-to-date and the proportion
of broadband access is also relatively low.
22
PRIVATIZATION
Status of Privatization Efforts
Since 1990, the Republic of Hungary has privatized nearly 1,300 enterprises
of the 1,860 enterprises previously owned by the state. The Hungarian
Privatization and State Holding Company (Allami Privatizacios es Vagyonkezelo
Rt.) manages these sales.
Most of the larger companies involved in the privatization program have
already been partially privatized with only 158 companies being left with some
degree of state ownership at the end of 2003. Permanent government control is
anticipated for 38 companies. The scope of property that should remain
state-owned in long term is defined by law as follows:
o national public utility service providers;
o property or companies of strategic importance for the national
economy; and
o 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 companies. Of these, the privatizations of Postabank,
Konzumbank and FHB (FHB Land Credit and Mortgage Bank, still majority-owned by
the State) were completed in 2003. In 2004 the targeted sale of MOL (Hungarian
Oil Company) and Dunaferr (a steel company) have been completed (in MOL, the
Republic still controls 11% of the ordinary shares and one preference share),
and that of Mahart (Hungarian Shipping Company) and Malev Hungarian Airlines are
ongoing. In March 2004, the targeted sale of 25% plus one votes of Hungaropharma
(a pharmaceutical company) was accomplished. The issuance of an exchangeable
bond for Richter (pharmaceutical company) shares has also been completed. The
privatization of each of Antenna Hungaria (Broadcasting) and Babolna (an
agricultural complex) are scheduled to begin in the near future. The Hungarian
Privatization and State Holding Company raised revenues of HUF 148.97 billion in
2003 from the privatization sales.
The revenues in 2004 are planned to reach approximately HUF 280-290
billion, of which HUF 190 billion will be paid into the central budget. Until
July 2004, revenues of around HUF 140 billion had been received. These receipts
are planned to be spent mainly on infrastructural projects such as further
motorway projects.
Methods of Privatization Used
Hungary is unique in Central Europe in that a large majority of its
privatizations utilize public tenders, with sales on a cash basis. 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 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 FORRAS Trust and
Investment Company (a state owned asset management company) in exchange for the
compensation vouchers. In June and July 2003, the offering was completed and the
shares of FORRAS Trust and Investment Company were listed on the Budapest Stock
Exchange.
23
BALANCE OF PAYMENTS AND FOREIGN TRADE
Balance of Payments
The following table sets out the balance of payments of Hungary for the
past five years:
Balance of Payments
As at the year ended December 31,
--------------------------------------------------------------------------
1999 2000 2001 2002 2003
------------- ------------- ------------- ------------- ---------------
(EUR million)
Current Account..................... (3,531) (4,380) (3,613) (4,900) (6,488)
Balance of Trade.................... (2,044) (3,180) (2,496) (2,203) (2,971)
Exports.......................... 24,059 31,278 34,697 36,821 38,161
Imports.......................... 26,102 34,457 37,193 39,024 41,132
Balance of Services................. 816 1,207 1,625 591 (170)
Revenues......................... 4,910 6,114 7,434 7,268 7,036
Expenditures..................... 4,094 4,907 5,809 6,677 7,207
Balance of Incomes.................. (2,713) (2,792) (3,192) (3,835) (3,930)
Credit........................... 843 1,262 1,452 1,314 1,178
Debit............................ 3,555 4,054 4,644 5,150 5,108
Current transfers, net.............. 408 385 450 547 583
General government, net.......... 28 28 35 71 113
Other sectors, net............... 380 357 415 476 470
Capital Account..................... 31 300 358 204 (75)
Financial Account................... 6,096 5,401 3,133 2,381 6,684
Direct investment, net........... 2,872 2,334 3,992 2,734 775
Portfolio investment, net........ 1,851 (380) 1,723 1,601 2,749
Other investment, net............ 1,374 3,447 (2,582) (1,954) 3,160
Net errors and omissions............ (355) (163) 62 350 412
Total............................... 2,241 1,158 (60) (1,965) 532
International reserves.............. (2,241) (1,158) 60 1,965 (532)
- ---------------------------
Source: National Bank of Hungary
Notes: There has been a methodological change in the calculation of the
balance of payments statistics related to reinvested earnings in order
to bring the methodology into 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 deficit appears to
increase although in reality this is just a phenomenon of the change in
the calculation methodology utilized. The data used in the tables and
in the text is based on this new methodology.
Hungary has experienced a growing current account deficit since 2001 as the
deficit (as a percentage of GDP) has increased from 6.3% in 2001 to 8.9% in
2003.
In 2003 the current account deficit grew to EUR 6,488 million, mainly due
to the strong internal demand caused by an expansionary fiscal policy. A second
cause was the drop in tourism revenues in line with global trends. In addition,
net foreign direct investment has decreased significantly as Hungarian companies
(MOL, OTP and others) have increased their presence in the region mainly through
the acquisition of local companies (such as in the Slovak Republic and Romania).
In spite of the worsening trend in the current account deficits prevailing from
2001, an improvement in the trade balance was recorded in the second half of
2003, largely resulting from the adjustment of fiscal policy, decreasing
household demand and growing external demand.
EU transfers are likely to worsen the current account by 0.2-0.3% of GDP
since payments by Hungary to the EU will be reported in the current account,
while the payments from the EU will appear partly in the current account and
partly in the capital account, depending on the type of such payments.
24
Foreign Trade
The following table presents the distribution of Hungary's trade in goods
by territory for the periods indicated:
Foreign Trade by Territory
As at the year ended December 31,
------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
---------------- ----------------- ---------------- ---------------- ----------------
Export Import Export Import Export Import Export Import Export Import
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(EUR million)
Developed
countries.......... 20,174 19,991 26,131 24,753 28,455 26,357 30,144 26,717 30,228 27,568
- of which EU
countries.......... 18,343 17,258 23,510 20,668 25,653 21,957 27,608 22,487 27,709 23,202
Central and
Eastern
European
countries.......... 2,984 3,843 4,044 6,031 4,858 6,322 5,116 6,641 5,901 7,364
- of which
CEFTA
countries.......... 1,885 1,938 2,551 2,668 3,123 3,010 3,295 3,379 3,787 3,843
Developing
countries.......... 906 2,963 1,121 4,595 1,246 5,319 1,488 6,627 1,525 7,207
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total............... 24,064 26,797 31,296 35,378 34,560 37,997 36,747 39,984 37,654 42,138
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
- ---------------------------
Source: Hungarian Central Statistical Office
The following table presents the commodity structure of Hungary's trade in
goods for the periods indicated:
Foreign Trade by Commodity
As at the year ended December 31,
------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
---------------- ----------------- ---------------- ---------------- ----------------
Export Import Export Import Export Import Export Import Export Import
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(EUR million)
Food, beverages,
tobacco........... 1,920 810 2,170 969 2,601 1,108 2,491 1,205 2,467 1,291
Crude
Materials......... 595 601 739 776 686 767 736 800 781 835
Fuels, electric
energy............ 390 1,640 553 2,962 669 3,120 601 2,991 619 3,260
Manufactured
goods............. 7,379 10,301 9,066 12,462 10,723 13,419 11,344 14,193 10,871 15,031
Machinery and
transport
equipment......... 13,780 13,445 18,768 18,209 19,881 19,584 21,575 20,794 22,915 21,720
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total.............. 24,064 26,797 31,296 35,378 34,560 37,997 36,747 39,984 37,654 42,138
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
- ---------------------------
Source: Hungarian Central Statistical Office
In recent years, Hungary's foreign trade in goods with industrialized
countries (in particular EU countries) has increased. OECD countries accounted
for 84.5% of Hungary's exports and 72.7% of imports in 2003. Within those
figures, EU countries accounted for 73.6% of exports and 55.1% of imports.
Trade Policy
Throughout the 1990s, Hungary took a number of steps 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 defence measures. The overall effect of these changes is that the
trade regime of Hungary has become more open and transparent (e.g. the average
level of customs duties decreased by about 50%, 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).
CEFTA. CEFTA was designed to increase trade among Central European
countries after the demise of COMECON and to integrate the region with the
economies of Western Europe. Hungary, Poland, the Czech Republic, Slovakia and
Slovenia were the original signatories of CEFTA, which came into effect on March
1, 1993. Romania became a member in July 1997 and Bulgaria in July 1998. In
accordance with CEFTA, most trade barriers on industrial products were
eliminated as of January 1, 2001. Trade barriers on agricultural products,
though relaxed, will not be eliminated entirely. The accession to the European
Union changed the relationships with countries participating in CEFTA, since the
trade with non-EU CEFTA members is regulated mainly by the relevant association
agreements or applicable EU laws.
25
EFTA. Hungary further increased its access to Western European markets by
signing a free trade agreement, effective October 1, 1993, with EFTA. The
agreement lowered restrictive trade barriers on industrial products more quickly
in the EFTA member countries than in Hungary and full and reciprocal free trade
was achieved within 10 years.
In addition, each of EFTA's seven members has signed bilateral agricultural
trade agreements with Hungary. The bilateral trade agreements with Austria,
Finland and Sweden, which were EFTA member countries until December 31, 1994,
expired at the date of their joining the EU. Hungary's trade with those
countries is now regulated by 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 the EU, EFTA and 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
investments in Hungary and Hungarian direct investments abroad in the years 1999
to 2003:
Foreign Direct Investment
As at and for the year ended December 31,
---------------------------------------------------------------
1999 2000 2001 2002 2003(1)
---------------------------------------------------------------
(HUF billions)
Direct investment:
- abroad.................................... 59.3 175.1 105.4 70.9 354.6
Equity capital and reinvested earnings... 58.7 191.7 95.0 52.8 337.0
Other capital............................ 0.5 (16.7) 10.5 18.1 17.7
- in Hungary................................ 785.4 780.0 1127.6 733.6 554
Equity capital and reinvested earnings... 630.8 690.3 660.8 745.0 892.4
Other capital............................ 154.7 89.7 466.8 (11.4) (338.4)
-------- -------- --------- --------- -----------
Net direct investment.......................... 726.1 604.9 1022.2 662.7 199.4
======== ======== ========= ========= ===========
- ---------------------------
Source: National Bank of Hungary
Notes: (1) Reinvested earnings are estimated by the Bank for the year 2003.
The cumulative amount of foreign direct investments ("FDI") received by the
Republic of Hungary up to December 31, 2003 reached Euro 37 billion. In 2003,
due to the expansion abroad of major Hungarian companies such as OTP (the
largest universal bank in Hungary), MATAV (Hungarian telecommunications company)
and MOL (Hungarian oil company), the FDI outflow was significantly higher
compared to previous years, which explains about 60% of the net FDI decrease.
The remainder can be attributed to the unfavorable global investment environment
which has led to moderate investment in Hungary.
26
The following table sets forth the distribution of net FDI in the Republic
of Hungary by industry sector during each of the years 1999 to 2003:
Foreign Direct Investment by Industry(1)
As at and for the year ended December 31,
------------------------------------------------------------
1999 2000 2001 2002 2003
------------------------------------------------ -----------
(HUF millions)
Non-manufacturing
Agriculture, hunting, and
forestry......................................... 6,372.2 2,937.9 (103.4) 970 0
Mining and
quarrying........................................ 2,450.3 688.6 34,767.4 4,476.9 (3,024.2)
Electricity, gas, and water
supply........................................... (5,067.6) (10,271.6) 10,743.1 2,789.9 583.1
(87.1) (4,828.7) (1,433.9) (1,618.3) 3,122.1
Construction.....................................
Trade, hotels and restaurants.................... 1,420.5 (2,323.6) 2,539.8 (1,633.1) 124.3
Transport, storage and communications............ 24,018.1 58,873.1 (288,332.3) 5,608.6 23,900.6
Financial intermediation......................... 42,122.7 57,632.5 31,619.5 (4,999.8) 64,809
Real estate and business activities.............. 68,684.1 57,382.9 (6,989.6) 35,913.6 24,160.8
Education........................................ n/a n/a n/a n/a n/a
Health and social work........................... n/a n/a n/a n/a n/a
Other social and personal services............... 46,532 62,162.5 39,689.1 23,345.2 7,057.7
---------- ------------ ----------------------- -----------
Non-manufacturing Total.......................... 243,259.6 280,480.3 (132,077.1) 92,038.2 86,683.9
========== ============ =========== =========== ===========
Manufacturing
Food and tobacco................................. 24,632.9 30,591.4 6,689.2 8,182.4 (57,638.1)
Textiles, wearing apparel, and leather........... 739.6 4,670.5 3,257.4 1,225.1 55.4
Wood, paper and publishing....................... 10,036.1 (5,953) 4,979.5 (1,007.5) 13,346.4
Refined petroleum and
chemicals........................................ (21,448.7) (92,132.7) 49,559 638.8 189,276.3
Non-metallic products............................ 9578.1 (2,049.5) 2819.2 (846.1) 2643.2
Basic metals and metal products.................. 5,869.8 2,534.2 7,261.9 6,590.5 108,358.7
Machinery and equipment.......................... 25,815.6 (2,038.6) 236,923.5 127,540.3 81,451.1
Recycling and other manufacturing................ 150.9 1,644.6 787.9 1,984.8 482.6
---------- ------------ ----------- ----------- -----------
Manufacturing Total.............................. 55,374.3 (62,733.1) 312,277.6 144,308.3 (40,577)
========== ============ =========== =========== ===========
Total .............................................. 298,633.9 217,747.2 180,200.5 236,346.5 46,106.9
========== ============ =========== =========== ===========
- ---------------------------
Source: National Bank of Hungary
Notes: (1) Reinvested profits are not included.
27
The following table sets forth the composition of net FDI in the Republic
of Hungary by country during each of the years 1999 to 2003:
Foreign Direct Investment by Territory
As at and for the year ended December 31,
--------------------------------------------------------------------
1999 2000 2001 2002 2003
--------- ---------- ---------- --------- -----------
(HUF millions)
Western Europe
Belgium............................................ (3,212.2) 5,2082.9 10,811 9,969.7 13,387
Denmark............................................ 125 (32,243.5) 3,392.1 3,304.3 (304.5)
France............................................. 14,361.7 18,213.7 11,614.8 6,271.6 11,537.5
Germany............................................ 62,993.3 (3,750.4) 161,592.5 34,344.7 24,638.6
United Kingdom..................................... 24,068.5 28,832.6 4,383.5 8,401.3 6,843.3
Italy.............................................. 7,769 (711.8) 14,962.7 8,031.7 9,440.6
Netherlands........................................ 104,475.7 117,549.2 (145,010.7) 116,643.6 40,735.4
Austria............................................ 11,800.3 2,674.4 57,899.3 8,156.3 100,743.9
Sweden............................................. 1,168.2 11,863.7 9,187.2 24,989.7 4,113.3
Switzerland........................................ 3,723.8 9,685.3 9,341.6 (15,965.6) 8,237.2
Canada................................................ 4,161 2,794.1 15,131.8 2,661.7 124.2
United States......................................... 36,592.3 58,473.8 31,457.3 23,200.8 17,119.3
Japan................................................. 8,732.4 4,429.7 76,679.1 8,878.8 8,218.4
Other................................................. 21,874.9 (52,146.5) (81,241.7) (2,542.1) (198,727.3)
--------- ---------- ---------- --------- -----------
Total................................................. 298,633.9 217,747.2 180,200.5 236,346.5 46,106.9
========= ========== ========= ========= ===========
- ---------------------------
Source: National Bank of Hungary
Notes: Reinvested profits are not included.
Foreign Exchange Reserves
The following table presents the level of Hungary's gold and foreign
exchange reserves as at the dates indicated:
Gold and Foreign Exchange Reserves
As at December 31,
----------------------------------------------------------
1999 2000 2001 2002 2003
---------- ---------- --------- ---------- ----------
(EUR millions)
International net gold reserves(1)..................... 29 30 32 33 33
Foreign exchange(2).................................... 10,845 12,038 12,163 9,887 10,108
---------- ---------- --------- ---------- ----------
Total.................................................. 10,874 12,068 12,195 9,920 10,142
========== ========== ========= ========== ==========
- ---------------------------
Source: National Bank of Hungary
Notes: (1) Gold valued at London fixings on the relevant date.
(2) Consists of foreign currencies, including the counterparts of
swapped gold, converted at exchange rates at the dates shown.
28
MONETARY AND FINANCIAL SYSTEM
National Bank of Hungary
The National Bank of Hungary (the "Bank") is the central bank of Hungary.
Its primary responsibility 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:
o setting the base rate, that is the rate for the Bank's main policy
instrument, the 2 week deposit facility, and the rates for the
overnight deposit and lending facilities;
o establishing reserve ratios for commercial banks;
o 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
o determining and implementing exchange rate policy in agreement with
the government.
The Bank is a company limited by shares, with capital of HUF 10 billion.
The company is owned by the Republic of Hungary and regulated by a special act.
The supreme body of the Bank is the General Assembly with the Minister of
Finance representing the Republic of Hungary as the sole shareholder. The
Monetary Council is the highest decision-making forum. The Monetary Council
holds meetings at least once every two weeks, and makes the most important
decisions concerning the general activities of the Bank, including the setting
of the official rate. The Monetary Council consists of at least seven and up to
nine members. Members include the Governor of the Bank (currently Mr. Jarai
Zsigmond), who is appointed by the President upon the proposal of the Prime
Minister for a 6-year term, the Deputy Governors of the Bank and other members,
all appointed by the President. The decisions of the Monetary Council are
executed by the Board of Directors, the operative body of the Bank. The Board of
Directors consists of the Governor and at least three and up to five Deputy
Governors of the Bank (currently there are 3 Deputy Governors). A bill has been
recently filed by the government with the Parliament for the amendment of the
National Bank of Hungary Act in order to increase the number of Monetary Council
members and to introduce a new system for their appointment. It is not yet
however clear when the bill will be accepted by the Parliament and what its
final wording will be.
Monetary Policy
As set forth in Hungarian law, the Bank is responsible for achieving and
maintaining price stability. At its meeting held on June 12, 2001, the Monetary
Council decided to conduct its monetary policy within the framework of inflation
targeting, which was recently supplemented by the exchange rate regime using a
wide fluctuation band. The inflation targets were 7% for the end of 2001, 4.5%
for the end of 2002, 3.5% for the end of 2003 and 3.5% for the end of 2004; the
Bank tolerates a deviance of +/-1 percentage point. At the end of the year 2003
the Bank set 4% as the target inflation rate for 2005.
The main monetary policy instrument used by the Bank to keep the rate of
inflation within the target band is it's two-week deposit facility. The Bank
periodically accepts unlimited two-week deposits at the central bank base rate
(i.e., the main official interest rate). The Bank, furthermore, 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 +/-1 percentage
point (the active overnight repo rate is 1percentage point above and the passive
overnight depo rate is 1 percentage point below the official rate).
29
The following table sets forth indicative interest rates of the Bank as
at the dates shown:
Selected Interest Rates
As at December 31, As at
-------------------------------------------------------------- November 9,
1999 2000 2001 2002 2003 2004
---------- ----------- ---------- ----------- ------------ --------------
(%)
Central bank base rate(1)......... 14.25 11.75 9.75 8.50 12.50 10.5
Real rate(2)...................... 2.7 1.5 2.8 3.5 6.4 3.7(3)
- ---------------------------
Source: Central Statistical Office, National Bank of Hungary
Notes: (1) 2-week
(2) The real rate is calculated as follows: (1 + central bank base
rate)/(1 + year-on-year inflation rate as at year end) - 1, where
interest rates are expressed as decimal numbers.
(3) Calculated with the latest available (September, 2004) CPI data.
At the beginning of 2003, the Bank reduced its 2-week main central bank
base rate twice, each time by 100 basis points. Later in 2003, the central bank
base rate was increased three times (altogether by 600 basis points). The
central bank base rate stood at 12.5% on November 28, 2003. On March 23, 2004
the Bank reduced the central bank base rate by 25 basis points, two weeks later
by an additional 25 basis points and then on 3 May by a further 50 basis points.
On August 16, 2004 the Bank reduced the central bank base rate by 50 basis
points and on October 19, 2004 by an additional 50 basis points. As a result, on
November 9, 2004 the central bank base rate stood at 10.5%.
Due primarily to the former depreciation of the forint, the recent increase
in VAT and the ongoing fiscal deficit, the Bank anticipates that the inflation
target for 2004 (3.5% +/-1%) will not be achieved and has abandoned this
inflation target. The Bank has therefore started to focus its inflation rate
targeting primarily on 2005, for which the target rate is 4% (+/-1%).
Since 2001, the Bank has also reformed the minimum reserves system. The
required reserve ratio has declined from 17% in 1995 to 5% since 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 required reserves ratio, the Bank gradually increased
the interest rate paid on the reserves. From May 1, 2004 (i.e., the date of the
accession to the EU) the reserves carry an interest rate equal to the central
bank base rate. The reason was partly to increase the profitability of the
banks, and partly to eliminate the indirect taxation of banks in accordance with
the European Central Bank's guidelines.
The Bank 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.
30
The following table provides information about the composition of money
supply as at December 31in each of the years 1999 through 2003:
Money Supply
As at December 31,
------------------------------------------------------
1999 2000 2001 2002 2003
--------- --------- --------- --------- ----------
(HUF billions)
M1 2,362 2,654 3,113 3,655 4,028
Quasi-money(1).............................................. 2,706 3,027 3,521 3,892 4,547
M2(2) ...................................................... 5,068 5,681 6,634 7,547 8,575
Securities of financial institutions 99 423 523 202 182
M3 5,192 6,130 7,178 7,859 8,792
Government paper and Bank bonds outside the banking
system.................................................... 2,390 2,561 2,881 3,540 4,360
M4(3) ...................................................... 7,583 8,690 10,059 11,399 13,151
- ---------------------------
Source: National Bank of Hungary
Notes: (1) Quasi-money = fixed term forint deposits + all foreign currency
deposits.
(2) M2 = M1 + quasi-money
(3) M4 = M3 + government paper and Bank bonds outside the banking
system.
Exchange Rate Policy
According to Act LVIII of 2001 on the National Bank of Hungary, the Bank
and the government jointly determine the framework of the exchange rate regime.
The Bank 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 combination with the adoption of the inflation targeting
framework in June 2001, these policies were consistent with the primary
objective of the Bank, i.e., to achieve and maintain price stability. These
changes allowed the Bank greater flexibility to resume an anti-inflationary
policy.
During 2001 and 2002, the Bank kept the central bank base rate high in
order to reduce inflation to the target level. This led to a gradual
appreciation in 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. To defend the forint, the Bank intervened in the
foreign exchange market by selling forints 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 corridor to 3% in order to stem
the flow of short-term speculative money into Hungary. Afterwards, the forint
fluctuated to around HUF 245/Euro until June 2003.
In June 2003, the government and the Bank decided on shifting the central
parity by 2.26% to HUF 282.3/Euro. This unexpected measure, and the growing
uncertainty about Hungarian monetary conditions, caused a depreciation in the
forint of roughly 10% to HUF 265/Euro, prompting the Bank to raise interest
rates in defense of the Hungarian currency by a total of 300 bps, to a level
higher than that pertaining at the beginning of the year.
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 Bank 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. With these favorable signs, the Bank started cutting interest
rates cautiously in 2004. See "Monetary Policy". In October 2004 the HUF was
traded around HUF 247 per EUR 1.00.
31
The following table sets out the official Bank exchange rate between HUF
and each of the USD and EUR for the periods indicated:
Selected Exchange Rates
As at and for the period ending
-------------------------------------------------------------------------------------
December 31,
------------------------------------------------------------------- June 30,
1999 2000 2001 2002 2003 2004
---------- ---------- ---------- ---------- ---------- ----------
HUF/1USD:
- Average........... 237.31 282.27 286.53 258.00 224.44 208.60
- End of period..... 252.52 284.73 279.03 225.16 207.92 208.76
HUF/1EUR:
- Average........... 252.80 260.04 256.68 242.96 253.51 253.18
- End of period..... 254.92 264.94 246.33 235.90 262.23 253.23
- ---------------------------
Source: National Bank of Hungary
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
Bank.
In accordance with the continuous liberalization of restrictions on capital
movements in recent years, effective from mid-June 2001, the forint is fully
convertible, not only in terms of current transactions but in terms of capital
transactions as well. The main remaining restrictions relating to foreign
investment have been removed: non-residents have unrestricted access to
Hungarian short-term securities, HUF-denominated accounts and the on-shore
derivatives market, and residents have unrestricted access to off-shore
financial services and short-term foreign securities. Minor restrictions remain
which have the objective of preventing money laundering. The full convertibility
of the forint meets all EU requirements.
The Hungarian Banking System
Since April 1, 2000, the supervisory agencies for commercial banks,
investment activities, pension funds and insurance activities have been brought
together under one umbrella agency - the Hungarian Financial Supervisory
Authority (in Hungarian: Penzugyi Szervezetek Allami Felugyelete). There still
are, however, separate legislative regimes for banking, insurance, pension funds
and investment services. Currently, the laws for insurance, banking and pension
funds are stable and almost totally EU compliant.
Since 1991, Hungary's banking system has been subject to a regulatory and
supervisory framework based on principles and guidelines of the Bank for
International Settlements (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 strengthened as the
banking system has developed. Bank supervisory responsibilities have largely
been transferred to the Hungarian Financial Supervisory Authority, with the
National Bank of Hungary retaining a more limited supervisory role.
Role of the National Bank of Hungary
While the Bank has no legal obligation to support Hungary's credit
institutions, the Bank may serve as a lender of last resort to the credit
institutions if they encounter temporary liquidity difficulties. Any loans made
by
32
the Bank to Hungary's credit institutions, in its capacity as lender of last
resort, constitute general unsecured obligations of those commercial banks.
Role of the Hungarian Financial Supervisory Authority
The Hungarian Financial Supervisory Authority must license a credit
institution before it may establish itself, 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. After May 1, 2004, this does not apply to credit
institutions having their seat in an EU Member State (which are regulated by
their home supervisory authority).
The Hungarian Financial Supervisory Authority is responsible for verifying
compliance by the credit institutions 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 thereof.
Banking Regulations
The Hungarian Financial Supervisory Authority does not have 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 Ministry of Finance may issue 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 Ministry of Finance 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 Ministry of Finance 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, substandard,
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
substandard assets, greater than 30% to less than or equal to 70% for doubtful
assets and greater than 70% to 100% for bad assets.
The value of any collateral, including real estate, held against an asset
may be used to offset the need to make provisions. The decree requiring
provisions does not provide guidelines on the extent to which collateral may be
used for this purpose. Individual banks are required to create their own
guidelines, which are to be approved annually by their auditors.
Country risk provisions are determined using a table which sets forth the
amount of provisions required based on the nationalities of the debtors in a
credit institution's portfolio. The country risk decree also requires credit
institutions to set absolute limits on the proportion of the relevant credit
institution's total assets which may be from a particular country.
In 2001, Hungary harmonized its guidelines on capital adequacy requirements
for investment institutions and commercial banks with EU Directive 93/6.
Structure of the Hungarian Banking System
The Credit Institutions Act provides for three types of credit
institutions:
o banks;
o specialized credit institutions; and
o cooperative credit institutions.
As of December 31, 2003, there were 36 fully authorized commercial banks
and specialized credit institutions operating in Hungary excluding the Hungarian
Development Bank Ltd. ("MFB") and the Hungarian Export-Import Bank Ltd.
("Hungarian Eximbank"), which carry out special public functions and policies.
The
33
number of cooperative institutions amounted to 182, of which 6 were credit
cooperatives and 176 were savings cooperatives. In addition, as of December 31,
2003, there were 30 insurance companies and 24 brokerage houses.
Only credit institutions are entitled to receive 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 13,782.5
billion in December 2003.
The following table illustrates certain trends in the Hungarian banking
system for the years 1999 through 2003:
Banking System - Selected Indicators
1999 2000 2001 2002 2003
---------- ---------- ----------- ----------- -----------
(% change, year-on-year)
Domestic credit.......................... 2.2 14.7 4.5 15.8 21.0
Credits to enterprises................... n/a n/a 9.5 5.9 19.6
Credits to households.................... n/a n/a 46.4 67.3 61.0
Broad money (M3)......................... 13.1 18.0 17.1 9.5 11.9
- ---------------------------
Source: National Bank of Hungary
Note: Disaggregated data are not available for 1999 and 2000 due to a
methodological change implemented in 2001.
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 include the two
housing savings associations and two private mortgage banks. There are three
special state-owned institutions: the Land Credit and Mortgage Bank (still
majority-owned by the State), the Hungarian Development Bank Ltd. and the
Hungarian Eximbank. As of December 31, 2003, the aggregate total assets of
specialized credit institutions amounted to HUF 1,166.6 billion.
Cooperative institutions may only provide limited types of financial
services, primarily the taking of deposits and the making of small loans.
Hungarian cooperative institutions, as of December 31, 2003, held aggregate
total assets of HUF 922.5 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:
o 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;
o the Credit Guarantee Corporation, which guarantees loans to small and
medium size business;
o the National Savings Cooperatives Institutions Protection Fund, which
is a voluntary consortium of cooperative institutions designed to
further such institutions' mutual interests;
o the Hungarian Export Credit Insurance Corporation, which provides
insurance for export credits and exchange rate risks; and
o the Hungarian Eximbank.
Ownership Structure of the Banking Sector
After the dynamic growth of foreign share ownership in the sector in recent
years, the proportion of registered capital held by foreign investors stabilized
in 2002. As of December 31, 2003, 81.9% of the total equity capital of the
Hungarian banking sector (excluding the MFB and the Hungarian Eximbank which are
owned by the Hungarian State) was held by non-residents.
The only banks in which the Republic now holds controlling interests are
the MFB (Hungarian Development Bank), the Hungarian Eximbank and the FHB (Land
Credit and Mortgage Bank). The Republic has
34
also retained a golden share in OTP Bank, which grants the holder certain
special shareholder rights. For example, there can be no shareholder quorum
without the presence of the golden shareholder 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 holder of the golden share,
can only be made with the consent of the holder of the golden share. In
compliance with the EU directive on the liberty of the capital markets, it is
proposed that the Hungarian State's special ownership rights, in this form,
should be abolished, golden shares being transformed into common shares.
Capital Markets
In the course of the 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 international changes, Hungary has moved
towards a universal financial system when regulating the relationship between
investment and banking services. With effect from January 1, 1999, banks with
proper authorization may carry on investment and financial service activities
within the same organizational frameworks, thereby offering universal banking
services. Regulation of the capital markets in Hungary is substantially
compliant with EU regulations and guidelines.
Stock Exchange
The Budapest Stock Exchange ("BSE") and the Budapest Commodity Exchange
("BCE"), both opened in 1990, are self-governing and self-regulating
organizations, which select their own bodies and officials, adopt their own
regulations, define their operating rules and fix the fees charged for their
services.
In February 2004, the BSE and BCE agreed to integrate the activities of the
BCE into the BSE. As a result, all exchange products traded on the BCE and all
members of the BCE will be transferred to the BSE. It is envisaged that once the
transfer is completed, the BCE will surrender all its exchange licenses and will
cease to exist. The integration process is ongoing and the estimated closing
date of this transaction is January 2005 at the earliest.
Recently, a majority stake in BSE was acquired by HVB Bank Hungary, which
represents a financial consortium. Members of the consortium and their stakes in
the BSE comprise: (i) HVB Bank Hungary, 25.2%; (ii) Wiener Borse, 14%; (iii)
Raiffeisen Zentralbank, 6.4%; (iv) Osterreichische Kontrollbank, 11%; and (v)
Erste Bank Vienna, 6.4%. This acquisition may be seen as the first step towards
the closer cooperation of stock exchanges in the Central European region.
35
The following table sets forth selected indicators relating to the Budapest
Stock Exchange at the end of and for the years indicated:
Budapest Stock Exchange - Selected Indicators
As at and for the year ending December 31,
--------------------------------------------------------------------
1999 2000 2001 2002 2003
------------- ------------ ------------ ---------- ------------
Total Spot turnover values (USD millions) 33,561 15,300 5,678 7,195 10,313
- of which:
Equities................................. 14,848 12,248 4,834 5,894 8,595
Government Bonds......................... 13,270 2,310 554 754 695
Corporate Bonds.......................... 144 173 125 256 316
Bonds of International Institutions...... 13 4 20 3 1
Mortgage Bonds........................... -- -- 10 84 474
T-Bills.................................. 5,274 553 132 190 208
Investment Funds......................... 2 2 3 2 4
Compensation Notes....................... 10 11 1 14 20
Total number of transactions................ 1,474,083 1,627,033 911,697 741,703 718,377
- of which:
Equities................................. 1,461,482 1,642,482 902,381 730,822 702,701
Government Bonds......................... 3,158 2,385 632 816 1,131
Corporate Bonds.......................... 650 765 1,166 1,793 2,690
Bonds of International Institutions...... 28 17 42 11 13
Mortgage Bonds........................... -- -- 80 365 1,036
T-Bills.................................. 1,873 547 89 216 435
Investment Funds......................... 1,106 2,855 4,694 1,134 1,348
Compensation Notes....................... 5,786 7,982 2,613 6,546 9,023
Average number of daily transactions........ 5,896 6,482 3,721 2,967 2,851
Average daily turnover (USD millions)....... 134.5 61.0 23.2 28.8 40.9
Average value per transaction (USD
thousands)............................... 23.0 9.5 6.3 9.7 14.4
Number of trading days...................... 250 251 245 250 252
Total Futures Turnover (USD millions)....... 5,620 4,865 2,624 3,347 6,530
- of which:
Budapest Stock Exchange Index "BUX"...... 4,842 3,217 981 960 1,480
Currencies............................... 92 104 64 301 1,870
Shares................................... 635 1,537 1,579 2,086 3,180
Interest Rates........................... 51 7 0 0 0
- Number of transactions................. 168,009 191,712 126,568 132,873 157,868
Total Options Turnover (USD millions)....... -- 9,747 1,014 1,040 812
- of which:
Equity options........................... -- 1,231 229 1,040 812
Index options............................ -- 8,516 785 0 0
Currency options......................... -- -- -- -- --
- Number of trades....................... -- 578 37 19 12
Average exchange rate HUF/USD(1)............ 238.46 278.22 286.58 231.41 215.17
- ---------------------------
Source: Budapest Stock Exchange
Notes: (1) Exchange rate used by the Budapest Stock Exchange for calculating
USD values expressed in this table.
36
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
Unless otherwise indicated, all data in this section and in other sections
of this document 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
EU-accession obligations, the Republic has started to produce 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
exercised state guarantees are reclassified as government debt and increase the
deficit, and the definition of the general government sector is extended to
include certain quasi-governmental institutions.
The general government budget data are compiled by the Ministry of Finance
in several steps. In January, the Ministry of Finance compiles the first version
of the general government budget for the previous year. For instance, in January
2004 the Ministry of Finance compiled the first version of general government
budget for the year 2003. This budget (compiled according to data available in
January) is called "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. For instance, in May 2004 the Ministry of Finance compiled
the second version of general government budget for the year 2003. This budget
(compiled according to data available in May) is called "fact budget". The main
source of the difference between the preliminary and fact budgets is the
uncertainty of the exact amounts of revenues and expenditures of the central
governmental institutions, because balance sheets of these institutions are not
compiled until May. The Ministry of Finance is obliged to compile the final
account within the end of August and the final account is compiled based on the
fact budget. For instance, the final account for the year 2003 was compiled at
the end of August 2004 according to fact budget. The final account is submitted
to the Parliament, and the Parliament approves the final account with a simple
majority vote. Note that the final account submitted to the Parliament may
differ from the final account approved by the Parliament due to amendments.
After the final account is approved by the Parliament, the Ministry of Finance
compiles the third version of the general government budget for the previous
year. For instance, in November 2004 the Ministry of Finance will compile the
third version of general government budget for the year 2003. This budget
(compiled according to the approved final account) is called "final budget". For
the year 2003 we can only provide preliminary or fact data because the Ministry
of Finance have not compiled the 2003 final budget yet (the final account was
approved on November 10, 2004).
For the year 2004 we provide data compiled by the Ministry of Finance. The
first type of data for the year 2004 were compiled by the Ministry of Finance
according to the budget act for the year 2004, which was approved by the
Parliament in autumn 2003. This budget (compiled according to approved budget)
is called "planned budget". The second type of data for the year 2004 are
compiled by the Ministry of Finance according to additional information obtained
during the course of 2004. This budget (compiled on the ground of the approved
budget and additional information obtained during the course of the year) is
called "expected budget". During the year 2004 the expected data were revised by
the Ministry of Finance several times, as presented in the following section. In
this prospectus we present expected data compiled by the Ministry of Finance in
the light of data available in October 2004. By this time the Ministry of
Finance expected 6.5% general government deficit to GDP ratio for the year 2004
according to GFS methodology (5.0-5.3% according to ESA 95 methodology).
37
Budget Trends
The following table sets forth the main fiscal trends in Hungary during the
years indicated:
Budget Trends
Fact Planned
1999 2000 2001 2002 2003(1) 2004(1)
----------- ----------- ----------- ----------- ----------- ----------
(HUF billions)
Central government budget surplus
(deficit) .......................... (338.1) (368.7) (402.9) (1,469.6) (732.4) (650.9)
Revenues(2) ........................ 3,227.6 3,681 4,068 4,357.3 4,938.2 5,481.5
Expenditures ....................... 3,565.8 4,049.7 4,470.9 5,826.9 5,670.6 6,132.4
Social security funds surplus
(deficit)........................... (46.6) (81.5) 7.4 (100.9) (349.0) (346.7)
Revenues ........................... 1,570.3 1,737.8 2,064.1 2,416.3 2,526.5 2,749.7
Expenditures ....................... 1,616.8 1,819.4 2,056.7 2,517.1 2,875.5 3,096.4
Extra budgetary funds surplus
(deficit) .......................... (9.5) 2.1 (10.7) 1.4 18.5 16.7
Revenues ........................... 146.7 166.2 183.1 233.8 244.6 296.7
Expenditures ....................... 156.2 164.1 193.8 232.4 226.0 280.0
Local government surplus (deficit) .... 1.1 (32.1) (9.9) (116.6) (31.7) (0.1)
Revenues(2) ........................ 1,476.6 1,619.0 1,892.5 2,169.4 2,501.7 2,552.9
Expenditures ....................... 1,475.5 1,651.1 1,902.4 2,285.9 2,533.4 2,553.0
General government budget surplus
(deficit) .......................... (424.1) (480.2) (444.0) (1,673.7) (1,094.5) (1,183.8)
Revenues(2)........................ 4,926.2 5,568.1 6,325.7 6,817.8 10,211.0 8,880.0
Expenditures....................... 5,350.3 6,048.3 6,769.7 8,491.5 11,305.5 10,063.8
General government budget surplus
(deficit) as % of GDP.............. (3.7%) (3.7%) (3.0%) (9.9%) (5.9%) (5.9%)(3)
ESA 95 methodology:
General government budget surplus
(deficit) .......................... n/a n/a n/a (1,567.5) (1,158.7) (937.8)
Revenues........................... n/a n/a n/a 7,476.3 10,341.4 8,993.2
Expenditures....................... n/a n/a n/a 9,043.8 11,500.1 9,931.0
General government budget surplus
(deficit) as % of GDP.............. n/a n/a n/a (9.2%) (6.2%) (4.6%)(3)
- -------------------------
Source: Hungarian Central Statistical Office and Ministry of Finance
Notes: (1) For methodological remarks on planned, expected, preliminary, fact,
and final budgets see "Public Finance - General Information -
Methodology".
(2) Revenues exclude privatization revenues.
(3) With projected GDP.
Fiscal Deficit in 2003. In 2003 the fiscal deficit decreased to 5.9% of GDP
from 9.9% of GDP in 2002 (based on GFS methodology; based on ESA 95 methodology
the deficit decreased from 9.2% in 2002 to 6.2% in 2003) due in large part to
extraordinary one-off expenditures in 2002. These one-time measures taken in
2002 included, in particular, subsidies to publicly owned companies (mainly in
the area of transportation and sports) and the purchase of shares in certain
companies (such expenditures were motivated by EU recommendations, pursuant to
which these companies' activities are typically considered as governmental
tasks). Despite the sharp reduction in the deficit in 2003, the result was still
in excess of the original forecast of 4.5% of GDP (according to GFS methodology;
the Ministry of Finance did not set any target under ESA 95 methodology for
2003).
The higher than planned deficit was largely attributable to higher interest
expenditure and higher mortgage loan subsidies as a result of unexpected
increase in interest rates, a one-off maternity benefit payment (payable
pursuant to a decision of the Hungarian Supreme Court), higher than planned
deficit of the social security funds (mainly due to higher pension payments and
higher than planned expenditures on pharmaceuticals) as well as lower than
planned economic growth. Despite the fact that the government decided to cut
expenditure by HUF 70 billion
38
(restrictions on mortgage subsidies and some rationalization in central
administration, which have mainly long term effects), the target was exceeded by
1.4% of GDP.
Expected Fiscal Deficit in 2004. According to the budget approved for 2004,
the general government deficit, measured as a percentage of GDP, was planned to
decrease to 4.3% (according to GFS methodology; 3.8% based on ESA 95
methodology), compared to 5.9% in 2003 (according to GFS methodology; 6.2% based
on ESA 95 methodology). In order to achieve this target, the average VAT rate
was increased, various VAT exemptions have been eliminated, certain changes have
been made to the personal tax system and certain controls over expenditures in
the central government institutions were strengthened.
On January 7, 2004, the Prime Minister announced the removal of Mr. Csaba
Laszlo from his post as Minister of Finance and appointed Mr. Tibor Draskovics,
formerly chief of the Prime Minister's Cabinet, as his successor. Mr. Draskovics
took office on February 15, 2004. Despite the adoption of the measures set out
above, Mr. Draskovics announced a revised target for 2004 budget: a deficit of
5.8% of GDP (based on GFS methodology; 4.6% based on ESA 95 methodology),
referring to the fact that the base data for planning the 2004 items has
significantly changed in December 2003.
On February 25, 2004, the cabinet decided to lower governmental
expenditures by HUF 185 billion. The Minister of Finance partially blocked the
accounts of the ministries and certain governmental institutions in order to
reduce their expenditures and allow the fiscal authority to achieve the aimed
deficit. The measure limited the total expenditures of the institutions for the
whole of the year 2004. According to Mr. Draskovics' evaluation, these measures
were expected to influence the expenditures mainly in the longer term and,
therefore, the impact was expected to be delayed, to a large extent, until the
end of the year 2004.
On March 17, 2004, the Ministry of Finance announced a prognosis of general
government deficit for 2004. The Ministry of Finance expected that the general
government deficit (excluding local government deficit) would be HUF 1,184.8
billion for the year 2004, i.e., 5.8% of GDP (based on GFS methodology; 4.6%
based on ESA 95 methodology). On April 7, 2004 the cabinet decided to cut
governmental expenditures by an additional HUF 13.75 billion. The reduction took
place in the same manner as the previous reduction from February 25, 2004.
On July 30, 2004 the cabinet decided that the Ministries may only spend the
remaining funds granted but not spent in previous years (in 2003 and partly in
2002) with the permission of the Minister of Finance. This means that the
Minister of Finance is able to block an additional sum of approximately HUF 106
billion if necessary.
On September 7, 2004, the Ministry of Finance published the August 2004
fiscal deficit figures. The deficit reached more than 100% of the annual
expected deficit, so the Ministry of Finance decided to revise the expected
deficit for 2004. The result of the revision was announced on September 15,
2004. According to ESA 95 methodology, the expected general government deficit
was set to 4.9-5.1% of GDP (local governments not included; the expected deficit
to GDP ratio including local governments was set to 5.0-5.3%). According to GFS
methodology, the expected general governmental deficit (local governments not
included) was increased from 5.8% to 6.5%. Mr. Draskovics also announced a
deficit contracting measure amounting to HUF 43 billion. The increase in the
projected deficit was mostly caused by shortfall of revenues of the budget (in
particular by shortfall in the collection of VAT, excises, registration tax and
personal income tax). The higher than expected expenditures of central budgetary
institutions, pensions, and pharmaceutical subsidies also contributed to the
change in the fiscal target. The new deficit target also assumes that a number
of additional measures and events will take place in 2004 with a positive effect
on the deficit. These measures and events include the receipt of additional
revenues from state-owned properties, less than projected contribution to the EU
budget, savings of extra-budgetary funds, and decreased support to the media.
On September 27, 2004, the Prime Minister Mr. Gyurcsany announced a new
program of the government. According to this program, the main goal of the
government's economic policy is the promotion of fast and balanced growth, which
allows improvement in the performance of the economy, reduction in the level of
employment and increase in the population's living standards. The government's
program aims to improve the competitiveness of enterprises, stimulate exports,
and to conduct a rigorous budget policy. The government also plans to improve
the economic balance by stimulating savings of households. The government's
program considers investments the key factor of growth. The government intends
to launch programs to stimulate investment and develop the infrastructure. The
program sets a target of creating jobs through tax incentives.
Planned Fiscal Deficit in 2005. On October 4, 2004 Mr. Draskovics announced
that he expects the 2005 budget deficit to reach 4.5-4.7% of GDP, according to
ESA 95 methodology.
39
Central Government Budget
The following table sets forth information concerning central
government revenues and expenditures for the years 1999 to 2002, as well as
similar data pursuant to the fact budget for 2003 and the planned budget for
2004:
Central Government Revenues and Expenditures
Fact. Planned
1999 2000 2001 2002 2003(1) 2004(1)
----------- ----------- ----------- ----------- ---------- -------------
(HUF billions)
Revenues:
Revenues from enterprises ............. 444.1 468.3 508.1 566.2 743.2 781.3
- of which:
Corporate tax (excluding financial
institutions except 2004 and 2003) . 248.8 273.2 319.4 364.9 413.7 459.9
Unified entrepreneurial tax (EVA) .. - - - - 31.0 54.5
Mine rents ......................... 11.5 13.7 13.7 14.7 17.8 19.0
Import duties and other taxes on
imports ............................ 140.2 136.6 122.9 125.7 131.3 43.0
Gambling tax ....................... 17.4 27.9 34.3 38.8 49.2 64.0
Other payments ..................... 26.3 16.9 17.7 22.2 22.1 21.0
Other centralized revenues ......... - - - - - 94.9
Environmental tax .................. - - - - - 25.0
Taxes on consumption .................. 1,405.5 1,659.7 1,783.6 1,895.4 2,355.9 2,624.7
- of which:
VAT ................................ 941.8 1,153.7 1,243.9 1,304.9 1,699.6 1,904.9
Excise duties ...................... 463.7 505.9 539.7 590.5 656.3 719.8
Payments by households ................ 626.0 755.2 896.4 1,016.2 1,006.2 1,115.4
- of which:
Personal income tax ................ 578.1 695.7 830.3 940.6 909.0 1025.6
Tax payments ....................... 4.2 5.0 5.2 7.1 7.0 3.9
Duties ............................. 43.7 54.4 60.9 68.5 90.2 86.0
Other centralized revenues ............ - - 62.6 68.7 78.2 -
Revenues of central budgetary
institutions ....................... 537.7 562.7 578.8 583.9 605.5 -
Revenues of budgetary institutions .... - - - - - 691.2
Payments by central budgetary
institutions ....................... - - 22.7 15.4 34.9 21.8
Payments by local governments ......... 4.6 4.6 4.7 5.5 7.1 6.0
Deductions from extra budgetary state
funds............................... 10.0 19.8 47.0 56.4 49.4 67.9
Revenues from international financial
relations .......................... - - - - - -
Revenues related to state treasury
assets ............................. 40.4 30.0 6.7 7.0 23.9 37.3
Corporate tax and dividends of
financial institutions ............. 13.7 19.5 32.4 31.7 - -
Dividends of the National Bank ........ 30.6 20.1 27.7 23.3 - -
Other revenues ........................ 12.3 13.0 9.3 8.7 7.8 10.1
Revenues related to debt services ..... 88.2 108.6 87.8 78.9 104.2 82.0
Refunding from the EU ................. - - - - - 43.9
----------- ----------- ----------- ----------- ---------- -------------
Revenues excluding revenues from
privatization ...................... 3,227.6 3,681.0 4,068.0 4,357.3 4,938.2 5,481.5
=========== =========== =========== =========== ========== =============
Revenues from privatization ........... 9.8 0.9 0.0 0.0 0.0 0.0
----------- ----------- ----------- ----------- ---------- -------------
Total revenues including revenues from
privatization ...................... 3,237.4 3,681.9 4,068.0 4,357.3 4,938.2 5,481.5
=========== =========== =========== =========== ========== =============
40
Fact. Planned
1999 2000 2001 2002 2003(1) 2004(1)
----------- ----------- ----------- ----------- ---------- -------------
(HUF billions)
Expenditures:
Subsidies to enterprises............... 176.8 179.3 215.3 237.2 295.7 280.3
Subsidies on final consumption ........ 74.8 82.8 90.9 99.0 104.9 117.0
Capital formation expenditure ......... 41.1 49.9 60.4 72.3 87.9 73.8
- of which: budgetary coverage for
central investments ................ - - - - - -
Guarantee and contributions to social
security system .................... 103.5 127.5 220.5 383.9 301.9 334.1
Benefits based on social security
system ............................. 274.9 303.6 329.0 389.2 461.8 477.7
Central government(2).................. 1,536.1 1,869.8 2,193.0 2,611.2 2,804.0 3,036.7
Backing of self-constituted social
organizations ...................... 2.9 2.9 3.0 3.1 2.7 3.7
Transfers to local governments ........ 449.0 428.8 508.9 620.5 749.4 795.1
Transfers to extra budgetary funds .... 228.0 1.1 0.0 0.0 2.6 18.2
Expenditures on international
financial relations ................ 1.9 2.3 2.5 1.6 1.5 7.9
Debt service, interest payments ....... 850.3 796.9 724.0 738.0 812.1 761.8
Other expenditures .................... 7.9 7.9 23.3 17.9 19.3 -
General contingency reserve, liability
reserves ........................... - - - - - 38.0
Extraordinary expenditures ............ 20.7 186.1 92.9 286.3 14.3 28.9
Debt assumption ....................... - - - 363.3 - 29.8
Expenditure on government guarantees .. 15.4 6.5 7.3 3.4 12.4 7.5
Expenditures relating to Bank
accounting ......................... 10.1 4.2 0.0 0.0 0.0 0.0
Obligations towards the EU ............ - - - - - 122.0
----------- ----------- ----------- ----------- ---------- -------------
Total expenditures .................... 3,565.8 4,049.7 4,470.9 5,826.9 5,670.6 6,132.4
=========== =========== =========== =========== ========== =============
Central budget surplus (deficit) ...... (328.1) (369.6) (402.9) (1,469.6) (732.4) (650.9)
Central budget surplus (deficit)
excluding revenues from
privatization ...................... (338.1) (368.7) (402.9) (1,469.6) (732.4) (650.9)
- ---------------------------
Source: Hungarian Central Statistical Office and Ministry of Finance
Notes: (1) For methodological remarks on planned, expected, preliminary, fact,
and final budgets see "Public Finance - General Information -
Methodology".
(2) Central government expenditures include the expenditures of the
central budgetary institutions and the chapter administered
professional appropriations; these are the two elements of the
expenditures of the Ministries of the Republic. Examples of such
expenditures include ministries, road maintenance and development,
motorway network, agricultural subsidies, etc.
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 budget for the coming year is
supposed to be approved prior to the beginning of the relevant year. If
Parliament does not approve the budget by that time, the government is obliged
to propose a bill on an interim budget without delay. If the bill on the interim
budget is not approved by Parliament either, the government is entitled to
collect revenues due to the central budget in accordance with the laws in force
and to make expenditures in line with the budget for the preceding calendar
year.
After the end of each calendar year, within 8 months, the final accounts
are compiled by the Government and are submitted to Parliament for final
approval.
The major components on the revenue side of the central government budget
are taxes imposed on consumption (including VAT), enterprise taxes and taxes on
households (primarily personal income taxes). On the
41
expenditure side, the major items are 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 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 year.
The Ministry of Finance must ensure central budget execution, solvency of
the central government, central government financing and 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 Allamadossag Kezelo Kozpont
Reszvenytarsasag, a special government debt management agency (the "Government
Debt Management Agency").
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 authorized 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 Bank.
In addition, the Treasury's responsibilities include the provision of funds
for government investments and other investments based on government decisions,
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. The Minister of Finance established the Government Debt
Management Agency in order to concentrate debt management functions into one
organization. Accordingly, the Government Debt Management Agency 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 from 2003, manages the
liquidity of the Single Treasury Account. In the context of liquidity
management, from 2004, the Government Debt Management Agency introduced new
secondary market operations (e.g., repurchase transactions on the domestic
securities market).
In the domestic market, the responsibilities of the Government Debt
Management Agency include the administration of auctions and subscriptions, the
development of the institutional framework and the structure of government
securities markets. Another important Government Debt Management Agency function
is to provide easily accessible, up-to-date information on the government
securities markets and on the financing of the Republic's borrowing needs in the
spirit of transparency and openness. In foreign debt management, the Government
Debt Management Agency 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. In relation to foreign exchange debt, the Bank
performs certain agency functions for the Republic based on an agency agreement
entered into between the Bank and the Ministry of Finance.
42
Recent Budgets
The following table compares the planned and expected budgets for 2004
with the fact budget for 2003 and shows similar data for the first half of 2004:
Year 2003 Compared with Year 2004
Fact Planned Expected 1H Planned Expected
2003(1) 2004(1) 2004(1) 2004 2004(1) 2004(1)
------------ ------------ ----------- ------------ ------------ ------------
(HUF billions) (% change
compared to 2003)
Revenues:
Revenues from enterprises............. 743.2 781.3 756.4 364.0 5.1 1.8
- of which:
Corporate tax (including
financial institutions)............ 413.7 459.9 424.9 182.8 11.2 2.7
Unified entrepreneurial tax (EVA).. 31.0 54.5 64.5 30.1 75.8 108.1
Mine rents......................... 17.8 19.0 19.0 9.7 6.7 6.7
Import duties and other taxes on
imports............................ 131.3 43.0 40.0 35.6 (67.3) (69.5)
Gambling tax....................... 49.2 64.0 64.0 29.9 30.1 30.1
Other payments..................... 22.1 21.0 21.0 10.3 (5.0) (5.0)
Other centralized revenues......... 78.2 94.9 105.0 58.1 21.4 34.3
Environmental tax.................. - 25.0 18.0 7.6 - -
Taxes on consumption.................. 2,355.9 2,624.7 2,404.6 1,033.0 11.4 2.1
- of which:
VAT................................ 1,699.6 1,904.9 1,695.0 712.8 12.1 (0.3)
Excise duties...................... 656.3 719.8 709.6 320.3 9.7 8.1
Payments by households................ 1,006.2 1,115.4 1,029.6 458.1 10.9 2.3
- of which:
Personal income tax................ 909.0 1,025.6 930.6 408.3 12.8 2.4
Tax payments....................... 7.0 3.9 4.0 2.6 (44.3) (42.9)
Duties............................. 90.2 86.0 95.0 47.2 (4.7) 5.3
Revenues of budgetary institutions.... 605.5 691.2 745.8 370.4 14.2 23.2
Payments by central budgetary
institutions....................... 34.9 21.8 25.0 5.1 (37.5) (28.4)
Payments by local governments......... 7.1 6.0 9.8 8.7 (15.5) 38.0
Deductions from extra budgetary
state funds........................ 49.4 67.9 67.9 33.9 37.4 37.4
Revenues related to state treasury
assets............................. 23.9 37.3 69.8 23.2 56.1 192.1
Other revenues........................ 7.8 10.0 10.8 5.8 28.2 38.5
Revenues related to debt
services........................... 104.2 81.9 85.4 39.2 (21.4) (18.0)
Refunding from the EU................. - 43.9 43.4 10.8 - -
Revenues excluding revenues from
privatization...................... 4,938.2 5,481.5 5,248.4 2,352.2 11.0 6.3
------------ ------------ ----------- ------------ ------------ ------------
Revenues including revenues from
privatization...................... 4,938.2 5,481.5 5,248.4 2,352.2 11.0 6.3
============ ============ =========== ============ ============ ============
43
Fact Planned Expected 1H Planned Expected
2003(1) 2004(1) 2004(1) 2004 2004(1) 2004(1)
------------ ------------ ----------- ------------ ------------ ------------
(HUF billions) (% change
compared to 2003)
Expenditures:
Subsidies to enterprises.............. 295.7 280.3 373.8 183.8 (5.2) (26.4)
Subsidies on final consumption........ 104.9 117.0 110.8 50.4 11.5 5.6
Capital formation expenditure......... 87.9 73.8 57.5 27.5 (16.0) (34.6)
Contributions to social security
systems............................ 301.9 334.1 333.2 167.1 10.7 10.4
Benefits based on social security
systems............................ 461.8 477.7 474.0 227.6 3.4 2.6
Central government.................... 2,804.0 3,036.6 2,983.5 1,555.5 8.3 6.4
Backing of self-constituted social
organizations...................... 2.7 3.7 3.7 1.9 37.0 37.0
Transfers to local governments........ 749.4 795.1 783.9 405.7 6.1 4.6
Transfers to extra budgetary
funds.............................. 2.6 18.2 15.9 6.7 600.0 511.5
Expenditures on international
financial relations................ 1.5 7.9 7.9 0.7 426.7 426.7
Debt service interest payments........ 812.1 761.8 894.8 500.0 (6.2) 10.2
Other expenditures.................... 19.3 14.5 20.4 - (24.9) 5.7
General contingency reserve
liability reserves................. - 37.1 - - -
Extraordinary expenditures............ 14.3 45.1 42.6 19.9 215.4 197.9
Debt assumption....................... - - - 28.9 - -
Expenditure on government guarantees.. 12.4 7.5 4.8 1.6 (39.5) (61.3)
Obligations towards the EU............ - 122.0 120.1 31.0 - -
-------------- ------------ ----------- ------------ ------------ ------------
Total expenditures.................... 5,670.6 6,132.4 6,227.0 3,208.0 8.1 9.8
============ ============ =========== ============ ============ ============
Central budget surplus (deficit)...... (732.4) (651) (978.6) (855.8) (11.1) 33.6
Central budget surplus (deficit)
excluding privatization revenues... (732.4) (651) (978.6) (855.8) (11.1) 33.6
============ ============ =========== ============ ============ ============
- ---------------------------
Source: Ministry of Finance
Notes: (1) For methodological remarks on planned, expected, preliminary, fact,
and final budgets see "Public Finance - General Information -
Methodology".
Taxation
The current Hungarian taxation system was introduced in 1988. While there
are no current plans to significantly change taxation, the Republic, in line
with its EU membership, is considering the implementation of administrative
amendments to harmonize its taxation machinery with that of other EU Member
States in terms of collection, technological advances and tax avoidance laws.
The most important elements of the Hungarian tax system are corporate
profit tax, corporate dividend 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 almost
50 countries, including almost all of the OECD countries. Of the OECD countries,
Hungary does not have a double taxation treaty with Iceland, New-Zealand and
Mexico. A treaty with Mexico is likely to enter into force on January 1, 2006.
44
Hungary, like many transformation countries, has a substantial "shadow"
economy, which is able to avoid paying taxes. Recent improvement in this
situation is 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. In 1998, Hungary
also consolidated its tax collecting powers into one authority and increased the
enforcement funding for this entity in the 1999 budget.
In recent years, to improve competitiveness and to harmonize the tax system
with EU standards, it has undergone some moderate changes.
Corporate Profit Tax and Corporate Dividend Tax
The corporate tax rate on profits is 16%; however, taxpayers may take
advantage of certain tax preferences. According to the general rules on dividend
taxation, a foreign entity receiving a dividend will pay a 20% dividend tax.
Such tax rate may, however, be reduced by the applicable double taxation treaty.
Dividend distributions to domestic entities and companies resident in the
European Community are generally exempt from the tax. A foreign entity receiving
interest and royalties from a local source is not subject to withholding tax.
The dividend withholding tax is expected to be abolished from January 1, 2006.
Personal Income Tax
Hungary has a three-tier graduated personal income tax rate structure with
rates of 18%, 26% and 38%. In 2005, the second tier (26% personal income tax
rate) is expected to be abolished.
Value Added Tax
The standard VAT rate is 25%, with a 15% rate on selected products and
services and a 5% rate on especially sensitive items (e.g., medicine, books).
Currently, there is no tax imposed on exports and some services (e.g., postal
and financial services). The VAT system is in all material aspects harmonized
with the relevant EU directives.
Registration Tax
Registration tax has been payable on the registration of cars since
February 2004.
Excise Duty
An excise duty is levied on the manufacturing, importing, warehousing,
storing and distributing of mineral oils, alcoholic products, beer, wine,
champagne, intermediary alcohol products and tobacco products.
Other Central Government Revenues
Customs duties are imposed on goods imported from outside the European
Community in accordance with the European Community 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 with each municipality. Local governments are permitted to
assess local business tax and various property taxes.
45
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
Year ended or ending December 31,
--------------------------------------------------------------------------
Fact Planned
1999 2000 2001 2002 2003(1) 2004(1)
----------- ---------- ----------- ------------ ----------- -----------
(HUF billions)
Health Fund:
Revenues........................ 653.6 734.1 889.9 1,024.6 1,025.4 1,105.2
Expenditures.................... 701.2 797.9 900.0 1,111.2 1,335.4 1,423.5
Surplus (deficit)............... (47.7) (63.7) (10.1) (86.7) (310.0) (318.3)
Pension Fund:
Revenues........................ 916.7 1,003.7 1,174.2 1,391.7 1,501.1 1,645.5
Expenditures.................... 91.6 1,021.5 1,156.7 1,405.9 1,540.1 1,670.7
Surplus (deficit)............... 1.1 (17.8) 17.5 (14.2) (39) (25.2)
Extra Budgetary Funds(2):
Revenues........................ 146.7 166.2 183.1 233.8 244.6 296.7
Expenditures.................... 156.2 164.1 193.8 232.4 226.0 280.0
Surplus (deficit)............... (9.5) 2.1 (10.7) 1.4 18.5 16.7
- ---------------------------
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 and the
'Wesselenyi Miklos' 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, and HUF 301.9 billion in
2003.
Social Security System
Before the fall of communism, social security 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 state. Since
the change of the political and economic system, self-provision has been taking
an increasing role. Today, everyone may influence his or her future social
benefit through the amounts paid to an individual account. In any event, the
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 where the requirements are adequately
met by the available resources, and should be referred to a higher level only if
his 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 institutes (hospitals, clinics and sanatoria).
Everyone has the right to sufficient information on their own illness and to the
necessary treatment. However, for ongoing and regular health care, a patient has
to duly pay his or her 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 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 traveling.
Several changes were introduced into the health insurance system in recent
years. The contribution of households to the financing of the health services
has been increased. A free or heavily subsidized health service is available in
some cases only for those who are the most in need. The number of days of sick
payment paid by employers has decreased, but the contribution of the employer to
the amount paid to the patient has increased.
46
Health fund contributions are similar to those for the pension fund. Employers
pay 11% of an employee's incomeand the employee contributes 4%. In addition,
there is a fixed monthly health care contribution by employers of HUF 3,450 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 recent decade.
The single tier pension system has been replaced by a three tier system, where,
besides the pension contribution deducted from the wage on a mandatory basis,
private pension funds offer the possibility of self-provision. Furthermore, an
employee may join a voluntary pension fund as well. The "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
26.5% of the employee's monthly salary, out of which 8.5% is paid by the
employee and 18% 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 8.5% contribution, 8% is transferred to
the private pension fund and 0.5% goes to the state fund. However, entrants are
obliged to choose a private pension system. For employees remaining solely in
the state system, the entire 8.5% contribution goes to the state pension fund.
Membership of voluntary or mutual pensions 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. Pensions reform takes at least 30 years, so it
will have the longest transitional period within the general budget reform.
Sustainability of the social security system
Health care system. In the last three years, the in-kind benefits of the
health insurance system 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 provisions. Because of the strict
budgetary requirements in 2004, numerous short-term measures were adopted (e.g.,
freezing of medicine prices, digressive financing techniques, introduction of
cost-volume agreements) which may assist in controlling the expenditures
relating to the health care system.
In order to achieve a lasting reduction of the increasing tension in
financing, the Government has started preparations for a financing reform of
health care. The reform should aim at curbing the expenditure growth, and
introduce cost effective services by changing the financing and incentive
mechanisms.
Pension System. According to demographic projections, the proportion of the
population over the retirement age compared to the population of working age
will increase significantly in the next decades. The rise in the retirement age
(see "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% wage
increase, 50% inflation).
The government believes that the introduction of the funded system should
start to have an effect on expenditure in the 2020's. By that time, newly
retired people should retire as members of the two-pillar system in increasing
numbers, and as such, they will only be eligible for a reduced amount of pension
from the pay-as-you-go pillar. On the other hand, members of the mixed system
pay a reduced amount of contribution into the pay-as-you-go pillar. Due to this
fact, there is expected to be an additional deficit in the pay-as-you-go system,
which is likely to increase until the 2020's in line with the increasing
participation of the active population in pension funds. The decrease of the
absolute number of employees, predicted by demographic projections, would also
result in the reduction of revenues of the pension system. The government
estimates that the mixed system should fully mature around the year 2060.
Although the government believes that the measures adopted in 1997, as part
of the pension reform, should bring positive effects to the sustainability of
Hungarian public finance in the long term, the adverse demographic trends
outlined above may nevertheless require an increasing role of the budget in the
financing of the pension system in the future.
47
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
Year ended or ending December, 31
----------------------------------------------------------------------------
1999 2000 2001 2002 Fact Planned
2003(1) 2004(1)
----------- ----------- ---------- ----------- ----------- -------------
(HUF billions)
Revenues:
Own revenues..................... 648.1 744.6 862.9 977.5 1,096.8 1,171.6
Subsidies........................ 449.0 428.8 508.9 620.5 749.4 783.9
Other revenues................... 379.5 445.5 520.8 571.4 655.4 597.4
----------- ----------- ---------- ----------- ----------- -------------
Total GFS-revenues.................. 1,476.6 1,619.0 1,892.5 2,169.4 2,501.7 2,552.9
=========== =========== ========== =========== =========== =============
Privatization revenues(2)........ 21.9 37.1 11.2 11.6 n/a 9.0
----------- ----------- ---------- ----------- ----------- -------------
Total revenues...................... 1,498.5 1,656.1 1,903.7 2,181.0 n/a 2,561.9
=========== =========== ========== =========== =========== =============
Expenditures:
Wages............................ 631.5 695.2 586.9 743.2 1,270.8 1,328.5
Investments...................... 261.5 320.6 385.6 481.1 427.1 368.0
Other expenditures............... 582.5 635.3 709.2 1,061.6 835.5 856.5
----------- ----------- ---------- ----------- ----------- -------------
Total GFS-expenditures.............. 1,475.5 1,651.1 1,902.4 2,285.9 2,533.4 2,553.0
=========== =========== ========== =========== =========== =============
Surplus (deficit)-GFS............... 1.1 (32.1) (9.9) (116.6) (31.7) (0.1)
Total surplus (deficit)............. 23.0 5.0 1.3 (105.0) n/a 8.9
- ---------------------------
Source: Ministry of Finance
Notes: (1) For methodological remarks on planned, expected, preliminary, fact,
and final budgets see "Public Finance - General Information -
Methodology".
(2) Fact data is not available for the year 2003 yet; the preliminary
privatization revenues are HUF 9.9 billions.
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.
EU Net Position
Starting from 2004, the Republic of Hungary, as a Member State of the EU,
is obliged to make annual payments to the EU budget on a basis comparable to
that of other EU Member States. In 2004, Hungary is expected to pay HUF 124.4
billion to the EU budget. This payment will be partly offset by budget
compensation payments from the EU to the Republic, in the amount of HUF 44.8
billion in 2004. In 2004, Hungary also expects to receive additional capital
transfers from the EU in the amount of HUF 78 billion from structural and
cohesion funds and agricultural funds. The actual amount of payments obtained
from these sources will, however, also depend on the Republic having a
sufficient number of viable projects, complying with the Convergence Program and
securing sufficient funds from the central government budget to cover
co-payments.
Although the annual contribution to the EU budget is an additional
liability, the Government believes that the amount of such contribution will be
significantly exceeded by the direct and indirect impact of funds originating
from the EU.
Medium Term Fiscal Program and the Convergence Program
On May 13, 2004, the Government announced the Convergence Program, which
sets out a medium term strategy as regards the participation of Hungary in the
Exchange Rate Mechanism (EMR II) and the future introduction of the Euro as the
official Hungarian currency. The Convergence Program was submitted to the
European Commission on May 14, 2004.
48
Under EU legislation, prior to adopting the Euro, Hungary must have
fulfilled the following convergence criteria ("Maastricht criteria"):
o price stability -- a member state maintains a sustainable price
performance and achieves an average rate of inflation (measured over a
period of one year before the examination) that does not exceed, by
more than 1.5 percentage points, the average rate of inflation of the
three member states which perform the best in terms of price
stability;
o long-term interest rates -- a member state has had 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 percentage points,
that of, at most, the three best performing Member States in terms of
price stability;
o the government budgetary position -- a member state has 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;
o government debt -- a member state has 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
o exchange rate -- requires participation for at least two years in the
ERM II and observance of 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 Convergence Program, the Maastricht criteria could be
achieved, without considerably compromising economic growth, by the year 2008.
Taking into account the minimum two-year participation in the EMR II (required
by the exchange rate condition), the Convergence Program contemplates the
introduction of the Euro in 2010, although it does not exclude an earlier date.
The Convergence Program anticipates that during 2005-2008 governmental
expenditures will be reduced by HUF 2,000 billion, taxes by HUF 1,000-1,200
billion, and the deficit by HUF 800-1,000 billion, which would mean a reduction
in the governmental redistribution of goods from approximately 48% of GDP to
approximately 44%. Currently, tax income amounts to approximately 39% of GDP.
The Convergence Program contemplates that this ratio would be reduced to 37.8%
in 2005, 37.5% in 2006 and 37.3% in 2007. Furthermore, the Convergence Program
is based on the assumption that the budget deficit would be reduced by 0.5% each
year, attaining 2.8% in 2008, and that the governmental debt would drop to 59.4%
of GDP by 2004, 57.9% by 2005, 56.8% by 2006, 55.6% by 2007 and 53.7% by 2008.
In October 2004, the European Central Bank ("ECB") published its 2004
Convergence Report evaluating the degree of convergence among the 11 non-euro
area European union member states, including the Republic. The reference period
of the report was from September 2003 to August 2004. On the Republic's
fulfillment of the Maastricht criteria, the ECB concluded that:
o inflation was considerably above the relevant reference values;
o the average value of long-term interest rates was well above the
reference value;
o fiscal deficit was considerably above the relevant reference values;
and
o the government debt ratio was below the 60% reference value, but
keeping the fiscal deficits at the current levels would not be
sufficient to keep the public debt ratio below 60%.
The ECB stated that the key requirements for achieving high degree of
sustainable convergence in Hungary were the implementation of a sustainable and
credible fiscal consolidation path, and a tangible improvement of the country's
fiscal performance. The ECB considered this important in particular in order to
contain inflationary pressures, decrease the large current account deficit and
restore credibility that in turn would also support exchange rate stability.
49
HUNGARIAN DEBT
General Information
Traditionally, the National Bank of Hungary was the primary entity through
which Hungary borrowed money in foreign currencies. Pursuant to the 1997
amendment to the National Bank of Hungary Act, the Bank 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 Minister of Finance, in
turn, has delegated these debt management functions to the Government Debt
Management Agency, which was part of the Treasury until 2001, when 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 - Roles of the Ministry of Finance, the Hungarian State Treasury and the
Government Debt Management Agency."
The Bank will remain 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
Bank 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 Bank may still act
as an agent of the Republic for the purposes of obtaining foreign loans and
issuing securities abroad. Since January 1997, the Bank has acted in this agency
role on the basis of an agency agreement, which was entered into by the Bank and
the Republic, as permitted by the amended National Bank of Hungary Act.
Because of this history, all references to public debt include debt of the
Republic and the Bank. 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 forints 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 Bank and the Republic relating to
external borrowings originally made by Bank 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 the Hungarian
public debt for the years indicated below:
Public Debt
As at and for the year ended December 31,
-----------------------------------------------------------------
1999 2000 2001 2002 2003
-------------- -------------------------------------- -----------
(HUF billions, unless otherwise indicated)
Internal Public Debt .......................... 4,350.2 4,717.5 5,397.4 6,956.9 8,008.7
% of Nominal GDP ........................... 38.18 35.81 36.35 41.56 43.12
External Public Debt .......................... 2,536.2 2,508.8 2,322.1 2,267.3 2,579.0
% of Nominal GDP ........................... 22.26 19.05 15.64 13.54 13.88
Total ......................................... 6,886.4 7,226.2 7,719.5 9,224.2 10,587.7
% of Nominal GDP ........................... 60.4 54.9 52.0 55.1 57.0
Nominal GDP ................................... 11,393.5 13,172.3 14,849.8 16,740.7 18,574.0
- ---------------------------
Source: Government Debt Management Agency
Notes: This table shows the public debt of the Republic from the perspective
of the economic obligations of the central government. The external
debt of the Bank, which has been transferred to the Republic as
discussed above, has been included on a pro forma basis. The transfer
of this debt involved, among other things, an exchange of the Bank's
external obligations for the effective cancellation of certain of the
central government's internal (forint denominated) obligations owed to
the Bank. In this table external debt refers to government obligations
denominated in foreign currency, while internal debt refers to
obligations denominated in local currency.
50
In the past decade, the central government's gross debt to GDP ratio
decreased substantially, falling from 72% at the end of 1996 to about 57% by the
end of 2003 (both the 1996 data and 2003 data are calculated according to GFS
methodology). This decrease was mainly due to the primary budget surplus, the
debt redemption effected from privatization proceeds, and the significant real
GDP growth. However, in the last two years the central government's gross debt
to GDP ratio grew remarkably, due to the expansionary fiscal policy. The total
public debt totaled HUF 10,587.7 billion at the end of 2003, showing an increase
of 18% in nominal terms compared with the end of the preceding year. A
significant part of the increase can be attributed to the revaluation of the
foreign currency debt, due to the depreciation of the forint in 2003. The 2003
budget deficit was higher than planned. The fiscal restrictions introduced by
the Minister of Finance are set to diminish the budget deficit and, thus, reduce
the central government's gross debt to GDP ratio.
External Public Debt
The following table sets forth the external public debt as at June 30, 2004
by category and by currency:
External Public Debt by Category and Currency(1)
(as at June 30, 2004)
Amount
-----------------
(EUR million)
By Category:
Bank loans (including bank to bank and syndicated loans)............................. 2,756.7
Bonds + FRN.......................................................................... 7,242.9
Loans from multilateral financial institutions (e.g. IMF and World Bank)............. 1,373.7
Trade related credits................................................................ n/a
-----------------
Total................................................................................... 11,373.3
=================
Percentage
-----------------
By Currency (after swaps): (%)
Euro................................................................................. 100
Other currencies..................................................................... 0
-----------------
Total................................................................................... 100
=================
Percentage
-----------------
By Currency (before swaps): (%)
Euro................................................................................. 67.5
JPY.................................................................................. 17.0
GBP.................................................................................. 6.6
US Dollar............................................................................ 8.3
Other currencies..................................................................... 0.6
-----------------
Total................................................................................... 100
=================
- ---------------------------
Source: Government Debt Management Agency
Notes: External short-term and long-term debt liabilities of the government
sector (financial derivatives are excluded). In this table external
debt refers to governmental obligations denominated in foreign
currency.
During 2004, until the end of September 2004, the Republic of Hungary
raised money on the international capital markets; in January, by issuing a EUR
1 billion bond maturing in 2014, in May, by issuing a GBP 500 million bond
maturing in 2014, and in June, by issuing a JPY 50,000 million bond maturing in
2009.
External Public Debt Service and Schedule of Payments
Neither the Republic nor the Bank has ever defaulted on the payment of the
principal of, or premium or interest on, any debt obligation issued by it.
51
The following table sets forth the schedule of repayments on external
public debt as at June 30, 2004:
Schedule of Payments on External Public Debt at June 30, 2004
(as at June 30, 2004)
Maturity Total
(EUR millions)
2004............................................. 446.3
2005............................................. 1,710.7
2006............................................. 721.2
2007............................................. 572.6
2008............................................. 896.9
2009............................................. 1,001.4
2010............................................. 1,122.2
2011............................................. 1,438.2
2012............................................. 93.7
2013............................................. 1,234.2
2014............................................. 2,073.9
After 2014....................................... 62.0
-------------
Total............................................ 11,373.3
=============
- ---------------------------
Source: Government Debt Management Agency
Notes: In this table external debt refers to governmental obligations
denominated in foreign currency.
Internal Public Debt
As of June 30, 2004, Hungary's total internal public debt, including the
social security and extra-budgetary funds, was HUF 8,619 billion. Approximately
0.5% of the government's internal debt as of June 30, 2004 consisted of loans
from the Bank. The majority of the remainder of the government's internal debt
represents either treasury bills or bonds.
Within the total HUF denominated central government debt, publicly issued
government securities have been playing a predominant role, reaching a total
share of 90% in 2003. Raising public funds on the domestic market depends to a
large degree upon the issuance of government bonds, which contributes to the
lengthening of the duration of the debt portfolio, as well. Of the total amount
of publicly issued HUF government securities outstanding, the share of
government bonds rose to above 70% in 2003, whilst discount T-bills and retail
government securities have played a diminishing role.
It is also an important objective of debt management to increase the
average maturity of the debt portfolio. The average maturity of internal public
debt issues (excluding debt acquired due to bank consolidation) was 2.33 years
at the end of 2002, and increased to 2.9 years by the end of 2003. This
indicator is expected to improve further as the 2004 financing plan aims to
significantly reduce the proportion of treasury bill issues.
The government has also guaranteed certain Hungarian indebtedness. As of
March 31, 2004, these guarantees totaled HUF 1,284 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.
52
Government Obligations to the National Bank of Hungary
The following table shows the government's obligations to the Bank,
including those due to net foreign currency losses, as of December 31 for the
years indicated:
Government Obligations Outstanding to the National Bank of Hungary
As of December, 31
-----------------------------------------------------------------------------
1999 2000 2001 2002 2003
--------------- ------------ -------------- -------------- ---------------
(HUF billions)
Short-term.......................... 404.8 367.5 172.1 167.1 198.1
Long-term........................... 2,083.4 1,834.9 1,384.3 995.2 693.8
--------------- ------------ -------------- -------------- ---------------
Total............................... 2,488.2 2,202.4 1,556.4 1,162.3 891.9
=============== ============ ============== ============== ===============
- ---------------------------
Source: National Bank of Hungary
Gross External Debt
The following table sets fort the distribution and maturity of gross
external debt in the Republic of Hungary as at December 31, 2003:
Gross External Debt(1)
As at December 31, 2003
-------------------------------------
Medium and
Long Term
Amount of Debt Maturity
------------------- ----------------
(EUR millions) (%)
Obligor:
National Bank of Hungary(2) ............................................. 3,469.5 71.7
The Republic(2).......................................................... 16,162.6 98.4
Private Sector(2)(3)..................................................... 26,872.3 79.6
------------------- ------------------
Entire economy(2)(3)..................................................... 46,504.4 85.5
=================== ==================
Financial derivative liabilities......................................... 1,586.1 -
------------------- ------------------
Entire economy (including financial derivative liabilities).............. 48,090.5 -
=================== ==================
- ---------------------------
Source: National Bank of Hungary
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.
53
The following table sets forth certain indicators related to Hungarian
gross external debt:
Debt Service Indicators of the Republic,
the Bank and the Hungarian Private Sector(1)
Year ended December 31,
-----------------------------------------------------------------
1999 2000 2001 2002 2003
----------- ------------ ----------- ----------- ------------
Gross foreign debt (incl. intercompany loans)......... 29,393 32,868 37,934 39,155 48,091
Gross foreign debt (excl. intercompany loans)......... 26,009 29,182 32,103 32,305 38,868
Gross external debt(2) (EUR millions)................. 23,733 25,658 26,377 22,825 26,996
Net external debt(3) (EUR millions)................... 7,380 7,385 4,493 5,465 8,101
Gross external debt/GDP(4)............................ 52.7 50.7 45.6 33.1 36.9
Net external debt/GDP................................. 16.4 14.6 7.8 7.9 11.1
Debt service(5)/exports(6)............................ 9.3 8.8 7.6 6.9 7.4
Gross external debt/exports........................... 81.9 68.6 62.6 51.7 59.4
Debt service/exports.................................. 16.8 14.4 13.2 13.1 13.9
Gross interest payments/exports....................... 4.8 4.7 4.6 4.0 3.7
Reserves import coverage(7)........................... 5.0x 4.2x 3.9x 3.1x 2.9x
- ---------------------------
Source: National Bank of Hungary
Notes: (1) The debt service indicators do not include prepayments, which in
1999 totaled EUR 294 million, in 2000 totaled EUR 396 million, in
2001 totaled EUR 588 million, in 2002 totaled EUR 354 million,
and in 2003 totaled 248 million. In this table external debt
refers to governmental obligations owed to non-resident entities.
(2) Gross foreign debt denominated in foreign currencies. Intercompany
loans are excluded.
(3) Net external debt represents total foreign currency debt less
foreign currency international reserves and other foreign assets
(such as export claims receivable, export credit granted to foreign
entities and the difference between the official price and the
market price of gold and silver). Intercompany loans are excluded.
(4) The GDP figures for 2003 are preliminary data of the Hungarian
Central Statistical Office.
(5) Debt service represents gross interest payments and amortization of
medium and long-term debt. Intercompany loans are excluded.
(6) Exports consist of exports of goods and services for the years
indicated.
(7) Reserves import coverage is the ratio of international reserves to
the monthly average of annual merchandise imports.
Relations with Multilateral Financial Institutions
International Monetary Fund
Since Hungary joined the IMF, it has borrowed 2,193.7 million in Special
Drawing Rights or SDRs (on January 8, 1999, 1 SDR=USD 1.407). By February 1998,
all SDRs borrowed were repaid in full.
International Bank for Reconstruction and Development (World Bank)
Since its accession in 1982 until the end of 2002, Hungary entered into 43
loan agreements with the World Bank. These agreements have enabled Hungary to
borrow over USD 3.8 billion. No new borrowings have taken place since 2000 and
there is no plan to borrow from the bank in the future.
European Bank for Reconstruction and Development (EBRD)
There are 92 Hungarian projects financed by the EBRD, valued at Euro 1,357
million.
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). The total amount
of loans reached Euro 353 million.
The latest framework agreement was signed in June 2004, whereby the CEB
undertook to co-finance water management projects in additional amount of HUF
42.5 billion.
European Investment Bank (EIB)
Since 1990 until the end of 2003, the EIB has financed Hungarian projects
worth Euro 3.43 billion in total. The EIB finances primarily infrastructure
projects and the energy sector, using a Framework Agreement with the
54
Republic of Hungary. Within this Framework Agreement in 2004 a facility
agreement was signed in the amount of EUR 445 million.
International Finance Corporation (IFC)
Between 1987 and 2003, the IFC financed 28 Hungarian projects worth
approximately USD 341 million.
55
DESCRIPTION OF THE DEBT SECURITIES
This is a brief summary of the terms and conditions of the debt securities
and the related fiscal agency agreement. Copies of the debt securities and the
fiscal agency agreement forms, which may differ from one series of debt
securities to another, will be filed as exhibits to the registration statement
that includes this prospectus. You should not assume this summary is complete
and should rely primarily on the information found in the exhibits. Each time
the Republic sells securities, the Republic will provide a prospectus supplement
that will contain specific information about the terms of that offering. The
prospectus supplement may also add, update or change information contained in
this prospectus. If the information in this prospectus differs from any
subsequent prospectus supplement, you should rely on the updated information in
the prospectus supplement.
General
The Republic will issue the debt securities under a fiscal agency agreement
between the Republic and a selected fiscal agent.
The Republic may issue the debt securities in one series or more, as it may
authorize from time to time. The prospectus supplement for each such series will
contain the following information:
o Designation, aggregate principal amount, any limitation on the
aggregate principal amount, currency of denomination and payment, and
authorized denominations
o Percentage of the principal amount at which the debt securities will
be issued
o Level and method of determining any interest rate(s)
o Any dates of interest rate payments and dates from which interest will
accrue
o Any index, price or formula used to set the amount of any payment of
principal, premium or interest
o Places where the principal, any premium and any interest will be
payable
o Any optional or mandatory redemption terms, or repurchase or sinking
fund provisions
o Whether the debt securities will be in bearer form and include any
interest coupons, or in registered form, or both bearer and registered
form, as well as restrictions on the exchange of one form for another
and on the offer, sale and delivery of debt securities in bearer form
o Other specific information as needed
The prospectus supplement for a given issue of debt securities will also
provide information on any material United States federal income and other tax
consequences applicable to debt securities that are:
o Issued in bearer form
o Issued with original issue discount
o Denominated or payable in more than one currency other than the USD
o Issued in amounts set by reference to any index
The debt securities will be direct, unconditional, unsecured and general
obligations of the Republic. Except as explained in the next section, the debt
securities will rank at least equally in right of payment with all other
unsecured and unsubordinated obligations of the Republic on or after the date
the debt securities are issued, except for such obligations as may be preferred
by mandatory provisions of applicable law. The debt securities will be backed by
the full faith and credit of the Republic. The Republic will give no preference
to one obligation over another on the basis of priority of issue date or
currency of payment.
The Republic may issue the debt securities as discounted securities which
either bear no interest or bear interest at a rate below market rates at the
time of issue. These discounted debt securities will be sold at a substantial
discount below the stated principal amount.
Holders of the debt securities will be paid the principal, any premium and
interest by check, wire transfer or another manner at the place(s) and in the
currency or currencies specified in the applicable prospectus supplement.
56
Claims for payment of the principal amount of the debt securities shall
become void ten years after such principal amount became due and payable. Claims
for payment of interest on the debt securities shall become void five years
after relevant interest payment date on which the interest became due and
payable.
Negative Pledge
As long as any debt security remains outstanding, the Republic will not
allow any Security Interest to be established on any of the Republic's or the
Bank's assets or revenues, present or future, in order to secure (i) any Public
External Indebtedness of the Republic having an original maturity of at least
one year; or (ii) any Public External Indebtedness of the National Bank of
Hungary having an original maturity of at least one year and incurred on or
prior to December 31, 1998, unless the debt securities are secured equally and
rateably to this external indebtedness.
For these purposes:
"External Indebtedness" means any obligation in respect of existing or
future Indebtedness denominated or payable, or at the option of the holder
thereof payable, in a currency other than the lawful currency of the Republic of
Hungary. If at any time the lawful currency of the Republic of Hungary becomes
the Euro, then External Indebtedness shall also include Indebtedness expressed
in or payable or optionally payable in Euro, if (i) such Indebtedness was issued
after the date on which the Euro became the lawful currency of the Republic of
Hungary, and (ii) more than 50% of the aggregate principal amount of such
Indebtedness was initially placed outside the Republic of Hungary.
"Public External Indebtedness" means External Indebtedness which: (i) is in
the form of, or represented by, bonds, notes or other similar securities; and
(ii) is, or may be, quoted, listed or ordinarily purchased and sold on any stock
exchange, automated trading system or over-the-counter or other securities
market.
"Indebtedness" means any indebtedness of any Person (whether incurred as
principal or surety) for money borrowed.
"Person" means any individual, company, corporation, firm, partnership,
joint venture, association, organization, state or agency of a state or other
entity, whether or not having separate legal personality.
"Security interest" means any lien, pledge, hypothecation, mortgage,
security interest, charge or other encumbrance or arrangement which has a
similar legal and economic effect, and, without limitation, anything analogous
to any of the foregoing under the laws of any jurisdiction.
Governing Law
The debt securities will be governed by the laws of the State of New York,
without regard to the conflicts of law principles of the State of New York
(other than Section 5-1401 of the General Obligation Law of the State of New
York), except the Republic's authorization and execution and any other matters
that must be governed by the laws of the Republic. The Republic will submit to
the jurisdiction of any state or federal court in New York City for lawsuits
brought by investors on the debt securities. Investors may also bring actions
against the Republic in the appropriate Hungarian courts. The Republic will
appoint the Embassy of the Republic of Hungary, Office of the Trade
Commissioner, 150 East 58th Street, 33rd Floor, New York, New York 10155, as its
authorized agent to receive any process that may be served in an action brought
by an investor.
Fiscal Agent
The fiscal agency agreement will govern the duties of the fiscal agent
appointed by the Republic for each series of debt securities. The fiscal agent
chosen for each series may not always be the same agent. The Republic may also
maintain deposit accounts and conduct other banking transactions in the ordinary
course of business with the fiscal agent.
Principal at maturity of a debt security will be payable at the office of
the fiscal agent upon surrender of the debt security. Interest will be paid by
check mailed to the registered holders of the debt securities.
A registered holder of a debt securities of a series, the aggregate
principal amount of which equals or exceeds $1,000,000, may elect in writing to
have interest paid to it by wire transfer in same-day funds to a bank account
maintained by the holder in the United States. Notwithstanding anything above to
the contrary, if the debt securities are to be issued in the form of global
securities (as discussed below) payment of the principal of and interest on any
such global debt securities will be made in accordance with the regular
procedures established by the depository for those global debt securities.
57
Please note that the fiscal agent is an agent of the Republic, not a
trustee for the holders of the debt securities, and does not have the
responsibility or duty to act for the holders as a trustee.
Event of Default; Event of Acceleration
For each series of debt securities:
o an "event of default" means any of the following:
o Non-payment--the Republic fails to pay the principal of or
interest on any debt security in the series for more than 30 days
after payment is due; or
o Breach of other obligations--the Republic does not perform any of
its other covenants under any debt security in the series for
more than 60 days after the holder of the debt security has given
written notice of the breach to the Republic at the fiscal
agent's corporate trust office;
o an "event of acceleration" means any of the following:
o Failure to take action--any action, condition or any other thing
which at any time is required to be taken, fulfilled or done in
order: (A) to enable the Republic lawfully to enter into,
exercise its rights and perform and comply with its obligations
under and in respect of that series of debt securities, (B) to
ensure that those obligations are legal, valid, binding and
enforceable and (C) subject to their official translation into
the Hungarian language, to make the debt securities admissible in
evidence in the courts of the Republic of Hungary, is not taken,
fulfilled or done within 30 days of receipt by the Republic of
written notice thereof; or
o Invalidity--it becomes illegal for the Republic to perform any of
its obligations under the debt securities or if these obligations
become invalid and not remedied by the Republic within 30 days'
written notice thereof;
If an event of default or an event of acceleration occurs, all of the debt
securities in the given series may, by written notice addressed and delivered by
the holders of at least 25% of the aggregate principal amount of the outstanding
securities in that series to the Republic at the office of the fiscal agent, be
declared to be immediately due and payable, unless prior to such date the
Republic shall have remedied the event of default or event of acceleration for
all the debt securities in that series.
If the fiscal agent receives notice in writing from holders of at least 50%
in aggregate principal amount of the outstanding securities in the given series
and/or a resolution is passed at a meeting of the holders of the debt securities
in that series, duly convened and held in accordance with the fiscal agency
agreement, to the effect that the event(s) of default and/or event(s) of
acceleration giving rise to a declaration of acceleration made pursuant to the
conditions above is or are cured or is or are waived by them following any such
declaration and that such holders request the fiscal agent to rescind the
relevant declaration, the fiscal agent shall, by notice in writing to the
Republic and the holders, rescind the relevant declaration whereupon it shall be
rescinded and shall have no further effect.
The Republic is not obliged to provide investors with periodic evidence
that there are no defaults and/or events of acceleration. Please also note that
the fiscal agency agreement does not provide for the holders to be notified of
the existence of an event of default or an event of acceleration or for any
right to examine the debt securities register.
Payment of Additional Amounts
All payments made in respect of a debt security, including payments of
principal and interest, to a holder of a debt security that is not a resident of
the Republic, will be made by the Republic without withholding or deducting for
or on account of present or future taxes, duties, levies or other governmental
charges of whatever nature imposed or levied by the Republic or any political
subdivision or taxing authority within the Republic. In the event the Republic
is required by law to deduct or withhold any such taxes from payments, the
Republic will pay such additional amounts as may be necessary so that the net
amount received is equal to the amount provided for in the debt security to be
paid in the absence of such deduction or withholding. A holder will not be paid
any additional amounts, however, if the tax is:
o a tax that would not have been imposed but for the holder's present or
former connection (or a connection of the holder's fiduciary,
shareholder or other related party) with the Republic, including being
or having been a citizen or resident of the Republic or being or
having been engaged in a trade or
58
business or present in the Republic or having, or having had, a
permanent establishment in the Republic;
o imposed on a payment to an individual and is required to be made
pursuant to the European Council Directive 2003/48/EC or any other
directive implementing the conclusions of the EU Council of Finance
Ministers meeting of November 26 and 27, 2000 on the taxation of
savings income or any law implementing or complying with, or
introduced in order to conform to, such Directive;
o imposed because the holder presents a debt security for payment more
than thirty (30) days after the date on which the payment became due
and payable;
o an estate, inheritance, gift, sales, transfer or personal property tax
or any similar tax, assessment or governmental charge;
o a tax, assessment or other governmental charge which is payable other
than by withholding;
o a tax that would not have been imposed but for the failure to comply
with certification, information or other reporting requirements
concerning the holder's nationality, residence or identity (or the
nationality, residence or identity of the beneficial owner of the debt
security), if the holder's compliance is required by the laws of the
Republic or of any political subdivision or taxing authority of the
Republic to avoid or reduce such tax;
o required to be withheld by any paying agent from a payment on the debt
security if such payment can be made without such withholding by
another paying agent; or
o imposed as a result of any combination of the items listed above.
Furthermore, no additional amounts will be paid with respect to any debt
security to a holder who is a fiduciary or partnership or other than the sole
beneficial owner of such payment to the extent that the settlor with respect to
such fiduciary, partner or beneficial owner, as the case may be, would not have
been entitled to payment of such additional amounts if they held the debt
security themselves.
Meeting of Holders of Debt Securities; Modification
The fiscal agency agreement contains provisions for convening meetings of
holders of debt securities in a given series to consider matters relating to the
debt securities in that series, including, without limitation, the modification
of any provision of the terms of the debt securities in that series. Any such
modification may be made if, having been approved in writing by the Republic, it
is sanctioned by an Extraordinary Resolution. Such a meeting may be convened by
the Republic and shall be convened by the fiscal agent upon the request in
writing of holders holding not less than 10% of the aggregate principal amount
of the outstanding debt securities in the given series. The quorum at any
meeting of holders convened to vote on an Extraordinary Resolution will be two
or more persons holding or representing not less than 50% of the aggregate
principal amount of the outstanding debt securities in the given series or, at
any adjourned meeting of holders, two or more persons being or representing
holders, whatever the aggregate principal amount of the outstanding debt
securities held or represented;
provided, however, that any proposals relating to a Reserved Matter may
only be sanctioned by an Extraordinary Resolution passed at a meeting of holders
at which two or more persons holding or representing not less than 75% of the
aggregate principal amount of the outstanding debt securities in that series or,
at any adjourned meeting, 25% of the aggregate principal amount of the
outstanding debt securities in the given series form a quorum. Any Extraordinary
Resolution duly passed at any such meeting shall be binding on all the holders,
whether present or not.
If a resolution is brought in writing, such a resolution in writing may be
contained in one document or several documents in the same form, each signed by
or on behalf of one or more holders.
For these purposes:
"Extraordinary Resolution" means:
o in relation to any Reserved Matter:
o a resolution passed at a meeting of holders duly convened and
held in accordance with the fiscal agency agreement by a majority
consisting of not less than 75% of the aggregate principal amount
of all outstanding debt securities in the given series; or
59
o a resolution in writing signed by or on behalf of holders of not
less than 75% of the aggregate principal amount of all
outstanding debt securities in the given series; and
o in relation to any other matter:
o a resolution passed at a meeting of holders duly convened and
held in accordance with the fiscal agency agreement by a majority
consisting of not less than 66.67% of the aggregate principal
amount of the outstanding debt securities in the given series
which are represented at that meeting; or
o a resolution in writing signed by or on behalf of holders of not
less than 66.67% of the aggregate principal amount of all
outstanding debt securities in the given series.
"Reserved Matter" means any proposal to:
o change any date, or the method of determining the date, fixed for
payment of principal or interest in respect of the debt securities in
the given series, to reduce the amount of principal or interest
payable on any date in respect of the debt securities in that series
or to alter the method of calculating the amount of any payment in
respect of the debt securities in that series on redemption or
maturity or the date for any such payment;
o effect the exchange or substitution of the debt securities in the
given series for, or the conversion of the debt securities in that
series into, shares, bonds or other obligations or securities of the
Republic or any other person or body corporate formed or to be formed;
o reduce or cancel the principal amount of the debt securities in the
given series;
o vary the currency or place of payment in which any payment in respect
of the debt securities in the given series is to be made;
o amend the status of debt securities in the given series;
o amend the obligation of the Republic to pay additional amounts;
o amend the events of default or the events of acceleration;
o amend the law governing the debt securities in the given series, the
courts to the jurisdiction to which the Republic has submitted in the
debt securities in that series, the Republic's obligation to maintain
an agent for service of process in the United States or the Republic's
waiver of immunity, in respect of actions or proceedings brought by
any holder of the debt securities in that series;
o modify the provisions contained in the fiscal agency agreement
concerning the quorum required at any meeting of the holders of the
debt securities in the given series or any adjournment thereof or
concerning the majority required to pass an Extraordinary Resolution
or the percentage of votes required for the taking of any action;
o change the definition of "Extraordinary Resolution" or "outstanding"
in the conditions of the debt securities in the given series and/or
fiscal agency agreement;
o instruct any holder or committee appointed on behalf of all holders of
the debt securities in the given series to withdraw, settle or
compromise any proceeding or claim being asserted pursuant to the
relevant condition of the debt securities in that series;
o confer upon any committee appointed any powers or discretions which
the holders of the debt securities in the given series could
themselves exercise by Extraordinary Resolution; or
o amend the definition of Reserved Matter.
Representative Committee
The holders of the debt securities in a series may, by a resolution passed
at a meeting of holders duly convened and held in accordance with the fiscal
agency agreement by a majority of at least 50% in aggregate principal amount of
the debt securities in that series then outstanding, or by notice in writing to
the fiscal agent signed by or on behalf of the holders of at least 50% in
aggregate principal amount of the debt securities in that series then
outstanding, appoint any persons as a committee to represent the interests of
the holders if any of the following events shall have occurred:
60
o an event of default or an event of acceleration;
o any event or circumstance which would, with the giving of notice,
lapse of time, the issuing of a certificate and/or fulfillment of any
other requirement provided for become an event of default or an event
of acceleration; or
o any public announcement by the Republic, to the effect that the
Republic is seeking or intends to seek a restructuring of that series
of debt securities (whether by amendment, exchange offer or
otherwise).
Such committee in its discretion may, among other things, (i) engage legal
advisers and financial advisers to assist it in representing the interests of
the holders, (ii) adopt such rules as it considers appropriate regarding its
proceedings and (iii) enter into discussions with the Republic and/or other
creditors of the Republic.
Global Securities
If specified in a prospectus supplement, the Republic will issue the debt
securities as one or more fully registered global securities to be deposited
with or on behalf of The Depository Trust Company, New York, New York ("DTC"),
its nominee and/or one or more depositories named in the prospectus supplement,
such as the Euroclear Bank S.A./N.V., as operator of the Euroclear System
("Euroclear") and Clearstream Banking, societe anonyme, Luxembourg
("Clearstream, Luxembourg").
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" as defined by the New York Uniform Commercial Code and a "clearing
agency" registered under the provisions of Section 17A of the Securities
Exchange Act of 1934. DTC holds securities of its participants and facilitates
clearance and settlement of securities transactions through electronic
book-entry changes in its participants' accounts. This eliminates the need to
exchange certificates. DTC's participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. DTC's book-entry system is also used by other organizations such
as securities brokers and dealers, banks and trust companies that work through a
participant. The rules that apply to DTC are on file with the SEC and the DTC
agrees and represents to its participants that it will administer its book-entry
system accordingly.
The issuance of global securities by the Republic means the Republic will
not issue certificates to each holder. A global security will be registered in
the name of the related depository or its nominee, who will keep a computerized
record of its participants (such as the holder's broker) whose clients have
purchased the debt securities. The participant will keep a record of its clients
who purchased the debt securities. Except as explained below or in an applicable
prospectus supplement, a global security may be transferred only in whole and
only to the appropriate depository or its nominee.
While the relevant prospectus supplement will describe the specific terms
of the depository arrangement for any portion of a series of debt securities
represented by a global security, the Republic anticipates that the following
provisions will apply to all depository arrangements.
After a global security is issued, the Republic expects that the depository
or nominee will credit on its electronic system the principal amounts of the
debt securities represented by the global security to the accounts of its
"participants", i.e., institutions that have accounts with the depository or
nominee. Only participants or persons that may hold interests through
participants may own beneficial interests in a global security. These beneficial
interests will be shown on, and transfers of global securities will be made only
through, records maintained by the depository and its participants. Please note
that laws in certain states require that purchasers must acquire securities in
physical form (i.e., certificates). Such limitations may prevent certain
investors from owning, transferring or pledging a beneficial interest in a
global security.
The Republic will provide the fiscal agent with payment of principal, any
premium or interest due on the debt securities on an interest payment date or at
maturity on that day. As soon as possible thereafter, the fiscal agent will make
such payments to the depository or nominee that is the registered owner of the
global security representing the particular debt securities according to
arrangements made between the fiscal agent and the depository. The Republic will
treat the depository or its nominee as the owner for all purposes. Therefore,
neither the Republic nor the fiscal agent will have any direct responsibility or
liability for payments made on account of beneficial ownership interests of a
global security or for maintaining or reviewing the related records.
After receiving payment of any principal or interest, the depository will
credit the accounts of the participants on the payment dates according to their
respective holdings of beneficial interests in the global securities as shown in
the relevant records. Payments by participants to owners of beneficial interests
in the global securities will be governed by the customary practices between the
participants and owners of beneficial interests in
61
"street name". However, payments will be the responsibility of the participants
and not of the depository or the Republic.
As long as a depository or nominee is the registered owner of a global
security, it will continue to be considered the sole owner and holder of the
debt securities represented by the global security. Except for cases outlined in
this section or in a prospectus supplement, owners of beneficial interests in a
global security:
o May not have the debt securities represented by the global security
registered in their names;
o Will not receive or be entitled to receive debt securities in
certificate form through exchange or some other manner; and
o Will not be considered the owners or holders of any debt securities
represented by a given global security.
Accordingly, investors owning a beneficial interest in a global security
must rely on participants of the depository to exercise any of their rights
under the debt securities. Participants must in turn rely upon the procedures of
the depository. Under current industry practice, if the owner of a beneficial
interest desired to take any action that the depository or its nominee would
have the right to take as the holder of the global security, the depository
would authorize the participant to take such an action and the participants
would then authorize beneficial owners to do the same or would otherwise follow
the instructions of the owner of the beneficial interest.
Unless stated otherwise in a prospectus supplement, a global security may
only be transferred as a whole in the following manner:
o By the related depository to a nominee of such depository or by a
nominee of such depository to such depository or any other nominee of
such depository; or
o By such depository or any such nominee to another depository for such
debt securities or its nominee or to a successor of the depository or
a nominee of such successor.
Under the following conditions, debt securities represented by a global
security may be exchanged for debt securities in certificate form in
denominations specified in the applicable prospectus supplement:
o If the depository or each of Euroclear and Clearstream, Luxembourg
notifies the Republic that it is unwilling or unable to continue as
depository or if the depository ceases to be a clearing agency
registered under applicable law and a replacement depository is not
appointed;
o The Republic decides not to have all of the debt securities of the
series represented by the global security;
o If there is a continuing actual or potential event of default that
would allow the holders of the related debt securities to declare
their principal and interest immediately due and payable;
o In such other events as may be specified in a prospectus supplement.
Any debt security that is exchangeable under the above conditions may be
exchanged for debt securities in certificate form registered in the names
specified by the depository. Debt securities that have been exchanged may be
presented for registration of transfer or exchange at the office of the fiscal
agent in London or Luxembourg. Subject to the above, a global security is not
exchangeable, except for a global security or global securities of the same
aggregate denominations to be registered in the name of the depository or its
nominee.
62
ENFORCEABILITY OF JUDGMENTS
It may be difficult for investors to obtain or enforce judgments against
the Republic. The Republic is a foreign sovereign. Foreign sovereigns are
generally immune from lawsuits and from the enforcement of judgments under U.S.
law. Foreign sovereigns may waive this immunity and limited exceptions to this
rule are spelled out in the U.S. Foreign Sovereign Immunities Act of 1976.
The Republic will be submitting to the jurisdiction of courts present in
New York City for lawsuits brought by investors on the debt securities. Thus,
the Republic will specifically agree that these courts have the authority to try
a case against it for these specific actions.
In addition, the Republic will waive its right to claim immunity for any
lawsuits brought by investors in courts present in New York City or in any
appropriate court in Hungary. This waiver of immunity will be limited. Such a
waiver will constitute only a limited and specific waiver for the purposes of
the debt securities and under no circumstances shall it be interpreted as a
general waiver by the Republic or a waiver with respect to proceedings unrelated
to the debt securities. Further, the Republic will not agree to waive its right
to immunity with regard to:
o actions brought against the Republic under U.S. federal securities
laws or any state securities laws;
o present or future "premises of the mission" as defined in the Vienna
Convention on Diplomatic Relations signed in 1961;
o "consular premises" as defined in the Vienna Convention on Consular
Relations signed in 1963;
o any other property or assets used solely or mainly for official state
purposes in the Republic or elsewhere; and/or
o military property or military assets or property or assets of the
Republic related thereto.
Thus, the Republic may assert immunity to such actions. Investors may have
a difficult time making any claims based upon such securities laws or enforcing
judgments against the property described above.
Under Law-Decree No. 13 of 1979 on International Private Law of the
Republic of Hungary, the parties may freely agree on a choice of a non-Hungarian
jurisdiction and of foreign law in commercial matters provided that there is a
substantial foreign element in their legal relationship. The agreed courts have
exclusive jurisdiction, unless otherwise provided by the parties.
Under Hungarian law, a judgment of a court established in a country other
than the Republic of Hungary may be enforced in the Hungarian courts, if: (i)
the jurisdiction of the foreign court is legitimate under the rules of
jurisdiction of Hungarian law; (ii) the decision is final under the foreign law
under which it was made; (iii) there is reciprocity between Hungary and the
state of the foreign court; and that (a) such judgment does not contravene the
basic principles of public policy in the Republic of Hungary; (b) the losing
party or its representative had proper or timely notice of the proceedings; (c)
the proceedings in which the judgment was made did not seriously breach general
principles of Hungarian procedural rules; (d) litigation between the same
parties involving the same dispute was not commenced in Hungary prior to the
initiation of the foreign litigation; and (e) Hungarian courts have not already
determined the matter (res judicata). However, Hungarian courts must recognize
and enforce judgments of a foreign court chosen by the parties in a commercial
matter (in Hungarian: vagyonjogi hatarozat) even if there is no reciprocity
between Hungary and the state of the foreign court, provided that the choice of
forum by the parties is valid under the above-mentioned decree.
Following the Republic's accession to the EU on May 1, 2004, Council
Regulation 2001/44/EC on jurisdiction and the recognition and enforcement of
judgments in civil and commercial matters applies to judgments and their
enforcement by and of courts in the Member States of the EU.
You should note that Hungary is a party to the New York Treaty on the
Recognition and the Enforcement of Arbitration Awards, dated June 10, 1958, and
therefore the recognition and enforcement of the arbitration awards obtained by
a holder of a debt security in a country being a party to such treaty is
possible in Hungary, provided that such forum has been chosen. No award will be
recognized and enforced however, if the provisions therein are contrary to
Hungarian public policy.
Due to the above rules on enforcement, even if a U.S. court were to rule in
an investor's favor, such an investor may have in certain cases a difficult time
collecting such amount in Hungary, the location of most of the Republic's
assets.
63
TAXATION
The following describes certain anticipated tax consequences resulting from
the ownership of the debt securities. This summary does not cover all the
possible tax consequences relating to the ownership of the debt securities and
is not intended as tax advice to any person. This description is based on laws,
regulations and interpretations as now in effect and available as of the date of
this prospectus. The laws, regulations and interpretations, however, may change
at any time, and any change could be retroactive to the date of issuance of the
debt securities.
Hungarian Taxation
Hungarian income and withholding taxes will only apply to payments on
the debt securities made to holders who are residents of Hungary, or have
permanent establishment in Hungary. Similarly, only Hungarian residents except
for permanent establishments will be subject to Hungarian taxes on gains
realized during a taxable year on a sale or redemption of the debt securities.
United States Federal Income Tax Considerations
The following is a summary of the principal U.S. federal income tax
consequences of the acquisition, ownership and retirement of debt securities by
a holder thereof. This summary only applies to debt securities held as capital
assets and does not address, except as set forth below, aspects of U.S. federal
income taxation that may be applicable to holders that are subject to special
tax rules, such as
o financial institutions,
o insurance companies,
o real estate investment trusts,
o regulated investment companies,
o grantor trusts,
o tax-exempt organizations,
o dealers or traders in securities or currencies,
o or to holders that will hold a debt security as part of a position in
a straddle or as part of a hedging, conversion or integrated
transaction for U.S. federal income tax purposes or that have a
functional currency other than the USD.
Moreover, this summary does not address the U.S. federal estate and gift
tax or alternative minimum tax consequences of the acquisition, ownership or
retirement of debt securities and does not address the U.S. federal income tax
treatment of holders that do not acquire debt securities as part of the initial
distribution at their initial issue price. Each prospective purchaser should
consult its tax advisor with respect to the U.S. federal, state, local and
foreign tax consequences of acquiring, holding and disposing of debt securities.
This summary is based on the Internal Revenue Code of 1986, as amended,
existing and proposed Treasury Regulations, administrative pronouncements and
judicial decisions, each as available and in effect on the date hereof. All of
the foregoing are subject to change, possibly with retroactive effect, or
differing interpretations which could affect the tax consequences described
herein.
For purposes of this description, a U.S. Holder is a beneficial owner of
debt securities who for U.S. federal income tax purposes is:
o a citizen or resident of the United States;
o a corporation or partnership organized in or under the laws of the
United States or any State thereof, including the District of
Columbia;
o an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or
o a trust (1) that validly elects to be treated as a United States
person for U.S. federal income tax purposes or (2)(a) the
administration over which a U.S. court can exercise primary
supervision and (b) all of the substantial decisions of which one or
more United States persons have the authority to control.
64
If a partnership (or any other entity treated as a partnership for U.S.
federal income tax purposes) holds the debt securities, the tax treatment of the
partnership and a partner in such partnership generally will depend on the
status of the partner and the activities of the partnership. Such partner should
consult its own tax advisor as to its consequences.
A Non-U.S. Holder is a beneficial owner of debt securities other than a
U.S. Holder.
Interest
Subject to the discussion below under the caption "Debt Securities Issued
with Original Issue Discount," if you are a U.S. Holder, interest paid to you on
a debt security, including any additional amounts, will be includible in your
gross income as ordinary interest income in accordance with your usual method of
tax accounting. In addition, interest on the debt securities will be treated as
foreign source income for your U.S. federal income tax purposes. A U.S. Holder's
ability to claim foreign tax credits is subject to various limitations.
Subject to the discussion below under the caption "U.S. Backup Withholding
Tax and Information Reporting," if you are a Non-U.S. Holder, payments to you of
interest on a debt security generally will not be subject to U.S. federal income
tax unless the income is effectively connected with your conduct of a trade or
business in the United States.
Sale, Exchange or Retirement
If you are a U.S. Holder, upon the sale, exchange or retirement of a debt
security you will recognize taxable gain or loss equal to the difference, if
any, between the amount realized on the sale, exchange or retirement, other than
accrued but unpaid interest which will be taxable as such, and your adjusted tax
basis in the debt security. Your adjusted tax basis in a debt security generally
will equal the cost of the debt security to you, minus any amortized bond
premium and any cash payments of principal you may have received. Any such gain
or loss will be capital gain or loss. If you are a non-corporate U.S. Holder,
the maximum marginal U.S. federal income tax rate applicable to the gain will be
lower than the maximum marginal U.S. federal income tax rate applicable to
ordinary income (other than certain dividends) if your holding period for the
debt securities exceeds one year. Any gain or loss realized on the sale,
exchange or retirement of a debt security generally will be treated as U.S.
source gain or loss, as the case may be. The deductibility of capital losses is
subject to limitations.
Subject to the discussion below under the caption "U.S. Backup Withholding
Tax and Information Reporting," if you are a Non-U.S. Holder, any gain realized
by you upon the sale, exchange or retirement of a debt security generally will
not be subject to U.S. federal income tax, unless
o the gain is effectively connected with your conduct of a trade or
business in the United States or
o if you are an individual Non-U.S. Holder, you are present in the
United States for 183 days or more in the taxable year of the sale,
exchange or retirement and certain other conditions are met.
Bond Premium
If you purchase a debt security at a cost greater than its stated
redemption price at maturity (generally, the debt security's stated principal
amount), then you will have purchased the debt security at a premium. If you
purchase a debt security at a premium, you may make an election (applicable to
all debt instruments you hold or later acquire) to amortize such bond premium as
an offset to interest income. The amount you may amortize is determined using
the constant yield method over the remaining term of the debt security. However,
if the debt security may be optionally redeemed after you have purchased it at a
premium, then special rules would apply that could result in a deferral of the
amortization of some bond premium until later in the term of the debt security.
Debt Securities Issued with Original Issue Discount
In general, a debt instrument will have original issue discount ("OID")
equal if its stated redemption price at maturity exceeds its issue price. The
material tax considerations for any debt securities issued with OID will be set
forth in the applicable Prospectus Supplement.
Indexed Debt Securities and Debt Securities that are Denominated in, or under
which Amounts are Payable in, More than One Currency.
The tax considerations regarding a debt security under which amounts are
determined by reference to any index or that is denominated or payable in more
than one currency will depend on a number of different factors. Any material tax
considerations relevant to U.S. Holders of such debt securities will be set
forth in the applicable Prospectus Supplement.
65
U.S. Backup Withholding Tax and Information Reporting
A backup withholding tax and information reporting requirements apply to
certain payments of principal of, and interest on, an obligation and to proceeds
of the sale or redemption of an obligation, to certain noncorporate holders of
debt securities that are United States persons. The payor will be required to
withhold backup withholding tax within the United States on a debt security to a
holder of a debt security that is a United States person, other than an exempt
recipient, such as a corporation, if the holder fails to furnish its correct
taxpayer identification number or otherwise fails to comply with, or establish
an exemption from, the backup withholding requirements. Payments within the
United States of principal and interest to a holder of a debt security that is
not a United States person will not be subject to backup withholding tax and
information reporting requirements if an appropriate certification is provided
by the holder to the payor and the payor does not have actual knowledge or a
reason to know that the certificate is incorrect. The backup withholding tax
rate is 28% for years through 2010.
In the case of payments to a foreign simple trust, a foreign grantor trust
or a foreign partnership, other than payments to a foreign simple trust, a
foreign grantor trust or foreign partnership that qualifies as a withholding
foreign trust or a withholding foreign partnership within the meaning of the
applicable U.S. Treasury Regulations and payments to a foreign simple trust, a
foreign grantor trust or a foreign partnership that are effectively connected
with the conduct of a trade or business in the United States, the beneficiaries
of the foreign simple trust, the persons treated as the owners of the foreign
grantor trust or the partners of the foreign partnership, as the case may be,
will be required to provide the certification discussed above in order to
establish an exemption from backup withholding tax and information reporting
requirements. Moreover, a payor may rely on a certification provided by a payee
that is not a United States person only if the payor does not have actual
knowledge or a reason to know that any information or certification stated in
the certificate is incorrect.
European Union Tax Reporting and Withholding
The Council of the European Union approved, on June 3, 2003, Council
Directive 2003/48/EC regarding the taxation of savings income (the "2003
Directive"). Under the 2003 Directive, if a paying agent for interest on debt
claim is resident in one member state of the European Union and an individual
who is the beneficial owner of the interest is a resident of another member
state, then the former member state will be required to provide information
(including the identity of the recipient) to authorities of the latter member
state. "Paying agent" is defined broadly for this purpose and generally includes
any agent of either the payer or payee. This requirement is subject to the right
of Belgium, Luxembourg and Austria to opt instead to withhold tax on the
interest during a transitional period (initially at a rate of 15% but rising in
steps to 35% after six years).
The Council agreed on July 19, 2004, in Council Decision 2004/587/EC, that
the 2003 Directive will become effective on July 1, 2005. However, this
effective date is contingent on certain non-members of the European Union
(Switzerland, Liechtenstein, Andorra, Monaco and San Marino), as well as
dependent and associated territories of the United Kingdom and the Netherlands,
adopting equivalent measures, including the option to apply withholding taxes,
effective on the same date. There is no assurance that all such non-members and
territories will satisfy this condition. As a result, the effective date of the
2003 Directive may be delayed, and no assurance can be given concerning whether
or on what date the 2003 Directive will become effective.
THE ABOVE SUMMARY IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL
TAX CONSEQUENCES RELATING TO THE OWNERSHIP OF DEBT SECURITIES. PROSPECTIVE
PURCHASERS OF DEBT SECURITIES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING
THE TAX CONSEQUENCES OF THEIR PARTICULAR SITUATIONS.
66
PLAN OF DISTRIBUTION
This summary plan of distribution will be supplemented by a description of
the particular offering and its terms and conditions in a prospectus supplement
issued for each series of the debt securities. Each such prospectus supplement
will include the following information:
o Names and addresses of any underwriters or agents
o Price of the debt securities
o Net proceeds received by the Republic from the sale of the debt
securities
o Discounts or other compensation to the underwriters
o Discounts or concessions made to dealers
o Security exchanges on which the debt securities may be listed.
The Republic may sell the debt securities:
o Through underwriters or dealers
o Directly to one or more institutional purchasers or
o Through agents.
By Underwriters
If underwriters are used in the sale, the debt securities will be acquired
by the underwriters for their own account. The underwriters may resell the debt
securities from time to time in one or more transactions, including negotiated
transactions, either at a fixed public offering price or at varying prices set
at the time of sale. The debt securities may be offered to the public either
through underwriting syndicates represented by the managing underwriters or
directly from syndicate members or designated dealers. Unless the applicable
prospectus supplement states otherwise, certain conditions must be met before
the underwriters will be obliged to purchase the debt securities and, once any
debt securities are purchased, the underwriters must then purchase all of the
debt securities offered in the prospectus supplement. Any initial public
offering price and discounts or concessions made to dealers may be changed from
time to time.
Direct Sales
The Republic may sell the debt securities directly to one or more
institutional investors. In this case, no underwriters or agents would be
involved.
By Agents
The Republic may sell the debt securities through agents. In this case, the
prospectus supplement will give the name of the agents involved in the offer and
sale of the debt securities and the commission the Republic will pay for the
agent's services. Unless the prospectus supplement indicates otherwise, the
agent will use its best efforts to solicit purchases during the time of its
appointment.
A prospectus supplement may also indicate that the Republic will authorize
agents, dealers or underwriters to solicit offers from specified institutions to
purchase the debt securities. These institutions would purchase the debt
securities at the public offering price given in the prospectus supplement, plus
accrued interest, on the basis of delayed delivery contracts providing for
payment and delivery on one or more specified dates in the future. These
contracts will be subject only to the conditions given in the prospectus
supplement, which would also contain the commission payable for solicitation.
The Republic may have agreements with underwriters, dealers and agents to
indemnify them against certain civil liabilities, including liabilities under
the United States Securities Act of 1933 or to contribute to any payments that
the underwriters, dealers or agents may be required to make. Underwriters and
agents may also engage in transactions with or perform services for the Republic
in the ordinary course of their business.
Each series of the debt securities will be a new issue of the debt
securities with no established trading markets. Underwriters, dealers and agents
may, but need not, make a market in the debt securities and may discontinue
market making at any time without notice. Neither the Republic nor any
underwriters, dealers or agents can give any assurance as to the liquidity of
the trading market for the debt securities.
67
VALIDITY OF THE SECURITIES
Certain legal matters with respect to the debt securities to be offered
will be passed upon on behalf of the Republic by the Legal Department of the
Government Debt Management Agency, and by White & Case LLP, New York, New York,
special United States counsel for the Republic, and, if sold to or through
underwriters, will be passed upon for such underwriters by their United States
counsel to be named in the prospectus or prospectus supplements thereto. All
statements in this prospectus with respect to matters of the law of Hungary have
been passed upon by the Legal Department of the Government Debt Management
Agency. In rendering its opinion, such United States counsel will rely as to all
matters of the law of Hungary upon the opinion of the Legal Department of the
Government Debt Management Agency.
AUTHORIZED AGENT IN THE UNITED STATES
The authorized agent of the Republic in the United States is the Embassy of
the Republic of Hungary, Office of the Trade Commissioner, 150 East 58th Street,
33rd Floor, New York, New York 10155.
OFFICIAL STATEMENTS AND DOCUMENTS
The information set forth herein relating to the Republic of Hungary has
been reviewed by Dr. Tibor Draskovics in his official capacity as the Minister
of Finance and is included herein on his authority.
The information for which the National Bank of Hungary has been cited as
the source was provided by the National Bank of Hungary. The information for
which the Ministry of Finance is cited as the source was provided by the
Ministry of Finance of the Republic. The information for which the Government
Debt Management Agency is cited as the source was provided by the Government
Debt Management Agency.
FURTHER INFORMATION
Registration statements, as they may be amended from time to time, relating
to the debt securities, on file at the SEC, contain further information. The SEC
maintains an Internet site that contains reports and other information regarding
issuers that file electronically with the SEC. The address for the SEC Internet
site is http://www.sec.gov. We filed the registration statements and
post-effective amendment No. 1 with the SEC in paper form, and we filed
post-effective amendment No. 2 with the SEC electronically.
68
INDEX TO TABLES AND SUPPLEMENTARY INFORMATION
External Debt of the Republic and the Hungarian National
Bank as at June 30, 2004.................................................T-1
Internal Debt of the Republic as at June 30, 2004...........................T-8
Guarantees provided by the Republic as at June 30, 2004.....................T-10
69
TABLES AND SUPPLEMENTARY INFORMATION
External Funded Convertible Currency Debt
of the Bank and the Republic
(As of June 30, 2004)
Year
Interest -------------------------- Original Principal
Title Rate(%) Issue Maturity(1) Amount Contracted Amount Outstanding
- --------------------- ------------ ---------- -------------- --------------------------- ----------------------------
A. NATIONAL BANK OF HUNGARY
1. U.S. Dollar Debt
a. Bonds
USD Bond.......... 8.875 1993 2013 USD 200,000,000 USD 200,000,000
----------------------------
Total............................................................................... USD 200,000,000
============================
- ---------------
(1) In certain cases, this column refers to the dates of scheduled installment
payments. Any such payments made prior to June 30, 2004 are reflected as
the difference between the amounts in the columns titled "Original Amount
Contracted" and "Principal Amount Outstanding".
b. Swap Arrangements
(credit)/debit
USD/JPY........... 10.765 1995 2005 USD 101,000,000
USD/EUR........... 10.765 1999 2005 USD (101,000,000)
USD/EUR........... 10.71 1999 2005 USD (151,362,260)
USD/JPY........... 10.71 1995 2005 USD 151,362,260
USD/JPY........... Floating 2004 2007 USD 140,400,000
USD/JPY........... Floating 1995 2007 USD 177,409,817
USD/EUR........... Floating 1997 2007 USD (138,250,000)
USD/EUR........... Floating 1999 2007 USD (177,409,817)
USD/EUR........... 8.875 1999 2013 USD (200,000,000)
USD/EUR........... 6.500 1999 2006 USD (180,000,000)
USD/EUR........... 6.500 1999 2006 USD (465,000,000)
USD/EUR........... 6.500 1999 2006 USD (105,000,000)
USD/EUR........... 6.571 2004 2004-11 USD (3,781,689)
USD/EUR........... 7.334 1999 2000-12 USD (32,320,621)
USD/EUR........... 6.226 1999 2000-13 USD (52,500,731)
USD/EUR........... 6.400 1998 2002-10 USD (75,833,333)
USD/EUR........... 6.400 1999 2002-10 USD (32,500,000)
USD/EUR........... 6.434 2000 2000-05 USD (4,918,866)
----------------------------
Total............................................................................... USD (1,149,705,240)
============================
Total U.S. Dollar Debt.................................................................... USD (949,705,240)
============================
2. Euro Debt
a. Bonds(2)
DEM Bond.......... 4.625 1998 2005 DEM 500,000,000 EUR 255,645,941
----------------------------
Total............................................................................... EUR 255,645,941
============================
- ---------------
(2) This bond/loan was denominated in Deutsche marks, but it is being repaid in
Euro.
T-1
Year
Interest -------------------------- Original Principal
Title Rate(%) Issue Maturity(1) Amount Contracted Amount Outstanding
- --------------------- ------------ ---------- -------------- --------------------------- -----------------------
b. Swap Arrangements
(credit)/debit
EUR/USD........... 8.030 1999 2005 EUR 96,845,667
EUR/USD........... 7.938 1999 2005 EUR 145,136,426
EUR/JPY........... 8.435 1997 2005 EUR 175,822,517
EUR/JPY........... 8.210 1997 2005 EUR 210,379,323
EUR/USD........... 8.165 1997 2007 EUR 119,318,141
EUR/USD........... 7.498 1999 2007 EUR 170,037,478
EUR/JPY........... 8.345 1997 2007 EUR 209,374,235
EUR/JPY........... 8.230 1997 2008 EUR 175,099,959
EUR/JPY........... 8.728 1997 2011 EUR 279,129,577
EUR/USD........... 7.030 1999 2013 EUR 191,410,443
EUR/CHF........... 7.255 2002 2005 EUR 6,825,929
EUR/CHF........... 6.203 2002 2005 EUR 13,310,580
EUR/USD........... 4.215 1999 2006 EUR 169,127,138
EUR/USD........... 4.499 1999 2006 EUR 430,555,555
EUR/USD........... 4.680 1999 2006 EUR 100,439,062
EUR/CHF........... 5.383 2002 2007 EUR 20,477,816
EUR/CHF........... 4.840 2002 2008 EUR 28,668,942
EUR/CHF........... 5.160 2002 2008 EUR 1,662,125
EUR/JPY........... 3.917 2004 2009 EUR 375,000,000
EUR/GBP........... 4.495 2004 2014 EUR 753,200,000
EUR/USD........... 6.950 2004 2004-11 EUR 2,959,068
EUR/USD........... 5.495 1999 2000-12 EUR 30,913,885
EUR/USD........... 4.433 1999 2000-13 EUR 50,265,757
EUR/USD........... 5.350 1998 2002-10 EUR 69,066,287
EUR/USD........... 4.723 1999 2002-10 EUR 31,125,090
EUR/USD........... 4.300 2000 2000-05 EUR 5,138,807
EUR/EUR........... 8.230 2000 2008 EUR (175,099,959)
EUR/EUR........... Floating 2000 2008 EUR 175,099,959
EUR/EUR........... 8.728 2000 2011 EUR (279,129,577)
EUR/EUR........... Floating 2000 2011 EUR 279,129,576
EUR/EUR........... 7.030 2000 2013 EUR (191,410,443)
EUR/EUR........... Floating 2000 2013 EUR 191,410,443
EUR/EUR........... Floating 2000 2005 EUR (400,000,000)
EUR/EUR........... 5.975 2000 2005 EUR 400,000,000
EUR/EUR........... Floating 2003 2005 EUR (400,000,000)
EUR/EUR........... 3.642 2003 2005 EUR 400,000,000
EUR/EUR........... Floating 2002 2010 EUR (2,548,000)
EUR/EUR........... 5.173 2002 2010 EUR 2,548,000
EUR/EUR........... 5.625 2001 2011 EUR (200,000,000)
EUR/EUR........... Floating 2001 2011 EUR 200,000,000
EUR/EUR........... 4.500 2004 2014 EUR (300,000,000)
EUR/EUR........... Floating 2004 2014 EUR 300,000,000
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
--------------------
Total............................................................................ EUR 3,861,289,806
====================
Total Euro Debt........................................................................ EUR 4,116,935,747
U.S. Dollar equivalent........................................................... USD 5,249,093,077
====================
T-2
Year
Interest -------------------------- Original Principal
Title Rate(%) Issue Maturity(1) Amount Contracted Amount Outstanding
- --------------------- ------------ ---------- -------------- --------------------------- -----------------------
(credit)/debit
3. Pound Sterling Debt
a. Swap Arrangements
GBP/EUR........... 5.500 2004 2014 GBP (500,000,000)
----------------------
Total............................................................................. GBP (500,000,000)
======================
Total Pound Sterling Debt............................................................. GBP (500,000,000)
U.S. Dollar equivalent............................................................ USD (915,000,000)
======================
4. Japanese Yen Debt
a. Bonds
Year
Interest -------------------------- Original Principal
Title Rate(%) Issue Maturity(1) Amount Contracted Amount Outstanding
- --------------------- ------------ ---------- -------------- --------------------------- -----------------------
JPY Bond.......... 6.000 1995 2007 JPY 30,000,000,000 JPY 30,000,000,000
JPY Bond.......... 6.750 1995 2005 JPY 25,000,000,000 JPY 25,000,000,000
JPY Bond.......... 6.900 1995 2010 JPY 15,000,000,000 JPY 15,000,000,000
JPY Bond.......... 5.000 1995 2005 JPY 30,000,000,000 JPY 30,000,000,000
JPY Bond.......... 6.000 1995 2015 JPY 10,000,000,000 JPY 10,000,000,000
JPY Bond.......... 5.000 1995 2007 JPY 30,000,000,000 JPY 30,000,000,000
JPY Bond.......... 5.200 1995 2005 JPY 25,000,000,000 JPY 25,000,000,000
JPY Bond.......... 5.000 1995 2008 JPY 25,000,000,000 JPY 25,000,000,000
JPY Bond.......... 5.200 1996 2011 JPY 40,000,000,000 JPY 40,000,000,000
-----------------------
Total............................................................................... JPY 230,000,000,000
=======================
b. Swap Arrangements
(credit)/debit
JPY/USD.......... 6.750 1995 2005 JPY (10,000,000,000)
JPY/USD.......... 6.750 1995 2005 JPY (15,000,000,000)
JPY/EUR.......... 5.200 1997 2005 JPY (25,000,000,000)
JPY/EUR.......... 5.000 1997 2005 JPY (30,000,000,000)
JPY/USD.......... 6.000 2004 2007 JPY (15,000,000,000)
JPY/USD.......... 6.000 1995 2007 JPY (15,000,000,000)
JPY/EUR.......... 5.000 1997 2007 JPY (30,000,000,000)
JPY/EUR.......... 5.000 1997 2008 JPY (25,000,000,000)
JPY/EUR.......... 5.200 1997 2011 JPY (40,000,000,000)
---------------------------
Total............................................................................... JPY (205,000,000,000)
===========================
Total Japanese Yen Debt................................................................. JPY 25,000,000,000
U.S. Dollar equivalent.............................................................. USD 235,404,896
==========================
T-3
Year
Interest -------------------------- Original Principal
Title Rate(%) Issue Maturity(1) Amount Contracted Amount Outstanding
- --------------------- ------------ ---------- -------------- --------------------------- -----------------------
5. Swiss Frank Debt
a. Swap Arrangements
(credit)/debit
CHF/EUR........... 5.625 2002 2005 CHF (10,000,000)
CHF/EUR........... 4.750 2002 2005 CHF (19,500,000)
CHF/EUR........... 4.000 2002 2007 CHF (30,000,000)
CHF/EUR........... Floating 2002 2008 CHF (42,000,000)
CHF/EUR........... 3.375 2002 2008 CHF (2,440,000)
Total............................................................................ CHF (103,940,000)
=====================
Total Swiss Frank Debt............................................................... CHF (103,940,000)
U.S. Dollar equivalent........................................................... USD (86,616,667)
=====================
NATIONAL BANK OF HUNGARY
Total External Funded Convertible Currency Debt................................ USD 3,533,176,066
=====================
T-4
B. REPUBLIC OF HUNGARY
1. U.S. Dollar Debt
a. World Bank
4113HU............... MT(3) 1996 2006-11 USD 7,750,000 USD 3,781,689
4275HU............... 6.4% 1998 2010 USD 150,000,000 USD 108,333,333
----------------------------
Total................................................................................ USD 112,115,022
============================
- ---------------
(3) Multiple tranches - different fixed rates
b. EIB
Air Traffic Services. MT 1992 2005 ECU 20,000,000 USD 4,918,866
Roads I.............. MT 1992 2012 ECU 50,000,000 USD 32,320,621
Roads II............. MT 1993 2013 ECU 72,000,000 USD 52,500,731
----------------------------
Total................................................................................ USD 89,740,218
============================
c. Bonds
USD Bond............. 6.500% 1999 2006 USD 750,000,000 USD 750,000,000
USD Bond............. 2.750% 1975 2027 USD 669,500 USD 405,400
----------------------------
Total................................................................................ USD 750,405,400
============================
Total U.S. Dollar Debt.................................................................... USD 202,260,641
============================
2. Euro Debt
a. World Bank
3549HU............... MT 1993 2007 USD 90,000,000 EUR 10,380,902
3596HU............... MT 1993 2008 USD 132,000,000 EUR 9,448,968
3597HU............... MT 1993 2006 USD 91,000,000 EUR 3,467,536
3635HU............... MT 1993 2008 USD 29,000,000 EUR 5,319,552
4230HU............... MT 1997 2010 DEM 69,000,000 EUR 10,189,809
4287HU............... MT 1998 2007 DEM 263,000,000 EUR 1,343,465
----------------------------
Total................................................................................ EUR 40,150,231
============================
b. EIB
Railways I........... MT 1998 2017 EUR 60,000,000 EUR 53,793,103
Railways I-B......... Floating 2001 2012 EUR 40,000,000 EUR 40,000,000
Railways II-B........ Floating 2001 2013 EUR 90,000,000 EUR 90,000,000
Railways III......... Floating 2002 2014 EUR 40,000,000 EUR 17,600,000
Railways IV.......... - 2003 - EUR 170,000,000 EUR 0
Environment.......... 4.67% 2001 2013 EUR 43,000,000 EUR 43,000,000
Environment II....... Floating 2002 2014 EUR 80,000,000 EUR 64,352,000
Environment III...... 4.49% 2003 2014 EUR 45,900,000 EUR 45,900,000
Flood protection..... Floating 2001 2012 EUR 60,000,000 EUR 60,000,000
Roads III............ Floating 2002 2014 EUR 75,000,000 EUR 28,470,000
Roads IV............. Floating 2003 2014 EUR 190,000,000 EUR 119,000,000
----------------------------
Total................................................................................ EUR 562,115,103
============================
T-5
c. Bonds
EUR Bond............. 4.375 1999 2009 EUR 500,000,000 EUR 500,000,000
EUR Bond............. Floating 1999 2005 EUR 1,000,000,000 EUR 1,000,000,000
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
----------------------------
Total................................................................................ EUR 5,500,000,000
============================
d. Other loans raised
Council of Europe
Development Bank
loans............. Various 1999-03 2009-13 EUR 183,500,000 EUR 183,500,000
EBRD loans........... Floating 2003 2014 EUR 4,739,006 EUR 4,504,233
KfW DEM loan......... 6.0583 1999-00 2015 DEM 120,000,000 EUR 54,275,591
KfW EUR loan......... 5.715 2000 2008 EUR 71,600,000 EUR 40,275,000
Syndicated loan...... Floating 1999 2004 EUR 400,000,000 EUR 400,000,000
Syndicated loan...... Floating 2003 2008 EUR 500,000,000 EUR 500,000,000
----------------------------
Total................................................................................ EUR 1,182,554,824
============================
e. Other loans assumed
EIB/Railways
II-A.............. Various 2002 2015 EUR 40,000,000 EUR 40,000,000
EIB/M3 Toll Motorway. MT 2002 2015 EUR 49,599,224 EUR 43,876,237
DEM loans............ Various 2000, 02 2005-06 DEM 66,596,000 EUR 22,628,756
EUR loans............ Various 2001-04 2006-18 EUR 416,620,707 EUR 153,518,299
----------------------------
Total................................................................................ EUR 260,023,292
============================
Total Euro Debt........................................................................... EUR 7,544,843,451
U.S. Dollar equivalent............................................................... USD 9,152,044,008
============================
3. Pound Sterling Debt
a. Bonds
GBP Bond............. 5.500 2004 2014 GBP 500,000,000 GPB 500,000,000
GBP Bond............. 2.750 1968 2018 GBP 1,889,700 GPB 52,300
----------------------------
Total................................................................................ GBP 500,052,300
============================
Total Pound Sterling Debt................................................................. GBP 500,052,300
U.S. Dollar equivalent.............................................................. USD 904,434,506
============================
4. Japanese Yen Debt
a. Bonds
JPY Bond............. 1.09% 2004 2009 JPY 50,000,000,000 JPY 50,000,000,000
----------------------------
Total............................................................................... JPY 50,000,000,000
============================
Total Japanese Yen Debt................................................................... JPY 50,000,000,000
U.S. Dollar equivalent.............................................................. USD 459,355,240
============================
T-6
5. Swiss Franc Debt
a. Loans assumed
EUROFIMA
loans............. Floating 2002 2002-08 CHF 126,050,000 CHF 103,940,000
Total............................................................................... CHF 103,940,000
============================
Total Swiss Frank Debt.................................................................... CHF 103,940,000
U.S. Dollar equivalent............................................................... USD 82,470,883
============================
REPUBLIC OF HUNGARY
Total External Funded Convertible Currency Debt...................................... USD 11,550,565,279
============================
TOTAL EXTERNAL CONVERTIBLE CURRENCY FUNDED DEBT OF
THE BANK AND OF THE REPUBLIC(4) .......................................................... USD 15,083,741,345
============================
- -------------
Source: National Bank of Hungary and Government Debt Management Agency
(4) All totals calculated on the basis of exchange rates as of June 30, 2004.
T-7
TABLES AND SUPPLEMENTARY INFORMATION
Internal Debt of the Republic
(As of June 30, 2004)
Year Original
Interest ---------------------------- Amount Principal
Title Rate (%) Issue Maturity Contracted Amount Outstanding
- ------------------------------------------ ----------- ----------- ---------------- -------------------- -----------------------
(HUF and USD millions)
1. Loans from the Bank for the purpose
of:
a. Central Budget:
Consolidation up to 1981........... 1991 1996-05 HUF 281,217.0 HUF 0
Consolidation 1982 to 1990......... (1) 1991 1996-04 HUF 161,364.0 HUF 3,754.0
1991............................... 1991 1999-05 HUF 60,000.0 HUF 0
b. 1991 Current Account............... (1) 1991 1999-05 HUF 40,000.0 HUF 8,650.0
c. Enterprises acquisition............ - - HUF (0) HUF 0
d. Multilateral Development Banks
capital contribution.................. (1) 1992 1998-08 HUF 6,621.4 HUF 2,207.2
e. State Development Institute loan
assumption............................ (1) 1992 1993-08 HUF 249,123.7 HUF 31,500.9
f. Budgetary institutions............. 1992 1993-06 HUF 1,740.5 HUF 0
-----------------------
Total Loans from the Bank............................................................................. HUF 46,112.0
USD 220.9
=======================
2. Loans from commercial banks to local
governments due to remuneration of
civil servants(2)..................... -0-
3. Loans to Hungarian State Railways
assumed by the Government through
the Central Budget in 2002 ........... Floating 2002 2006, 07, 08 HUF 23,700.0 HUF 13,771.0
USD 66.0
=======================
4. Loans from the Bank due to net
foreign currency losses............... -0-
5. Loans taken over from the Road Fund
in 1999............................... Floating 1999 2002-06 HUF 21,154.0 HUF 3,574.9
USD 17.1
=======================
6. Other loans taken over at the end of
2002.................................. Floating 2002 2003-16 HUF 177,836.1 HUF 26,845.7
USD 128.6
=======================
7. Other loans taken over in 2004........ Floating 2004 2014 HUF 12,512.5 HUF 11,943.8
USD 57.2
=======================
8. Hungarian Treasury Bonds for the purpose of:
a. Central Budget:
Consolidation of 1984-1986......... -0-
b. Commercial banks initial capital... -0-
Fixed
c. 1991-04 Central Budget............. Floating 1991-04 2004-20 HUF HUF 5,284,599.6
d. Ex-Housing Loans................... Floating 1989 2004 HUF 19,100.0 HUF 1,895.4
e. Housing Loans...................... Floating 1992 2016 HUF 83,200.0 HUF 41,877.5
f. Purchase of net rouble
receivables held by the Bank.......... 8.4 1992 2002, 07, 12 HUF 48,300.0 HUF 23,132.2
g. Loan Consolidation Program and
Bank Consolidation Program............ Floating 1993-96 2013-16 HUF 395,000.0 HUF 259,783.0
h. Higher Education (Expo)............ HUF HUF -0-
i. Securitization of non-interest
bearing debt outstanding to the
Bank.................................. Floating 1994-96 2004-26 HUF 417,110.0 HUF 329,649.0
T-8
Year Original
Interest ---------------------------- Amount Principal
Title Rate (%) Issue Maturity Contracted Amount Outstanding
- ------------------------------------------ ----------- ----------- ---------------- -------------------- -----------------------
(HUF and USD millions)
j. Social Security Fund Bonds
assumed by the Central Budget......... Floating 1994 2004 HUF 500.0 HUF 500.0
k. Bonds given to the Hungarian
Privatization and State Holding
Company............................... Floating 1998, 2002 2006-10 HUF 60,148.6 HUF 18,856.3
l. Bonds given to the Postabank by Floating,
Consolidation......................... Fixed 1998 1999-08 HUF 129,022.3 HUF 79,022.3
m. Bonds given to the Hungarian
Development Bank Ltd. ................ Fixed 2002 2003-11 HUF 138,537.7 HUF 75,644.1
-----------------------
Total Hungarian Treasury Bonds........................................................................ HUF 6,114,959.5
USD 29,291.8
=======================
9. Social Security Fund Bonds............ 1993-94 2003-04 HUF 16,500.0 HUF -0-
USD -0-
=======================
10.Hungarian Treasury Bills:
a. Fixed interest rate................ 6.5-11 Various 360-720 days HUF 606,722.8
b. Discount........................... Various Various 42-364 days HUF 1,795,031.8
-----------------------
Total Hungarian Treasury Bills ....................................................................... HUF 2,401,754,6
USD 11,504.9
=======================
TOTAL REPUBLIC INTERNAL DEBT............................................................................. HUF 8,618,961.5
U.S. Dollar Equivalent(3) ............................................................................ USD 41,286.5
=======================
- -------------
Source: Government Debt Management Agency
(1) Loans from the Bank to the Republic bear interest 3 month T-Bills. The
interest, which the Bank can change from time to time, was 11,41% at June
30, 2004.
(2) These obligations to commercial banks have been assumed by the government
through the Central Budget.
(3) All totals calculated on the basis of exchange rates as of June 30, 2004.
The exchange rate was 208,76 HUF/USD at June 30, 2004.
T-9
TABLES AND SUPPLEMENTARY INFORMATION
Guarantees Provided by the Republic
(As of June 30, 2004)
Title Principal Amount Outstanding
- ---------------------------------------------------------------------------------- ----------------------------------
(millions)
Republic Guaranteed Debt in Foreign Currency
(expressed in USD equivalents)(1)
Loans raised from international financial institutions........................ USD 251.32
Guarantees for various purposes............................................... USD 1,649.92
Guarantees based on law....................................................... USD 577.83
----------------------------------
Total Guarantees in Foreign Currency.......................................... USD 2,479.07
==================================
Republic Guaranteed Debt in HUF
Guarantees for various purposes............................................... HUF 185,187.90
Guarantees based on law....................................................... HUF 721,603.50
----------------------------------
Total Guarantees in HUF....................................................... HUF 906,791.40
USD Equivalent(1).......................................................... USD 4,343.70
==================================
TOTAL REPUBLIC FOREIGN CURRENCY
AND HUF GUARANTEES............................................................ USD 6,822.77
==================================
- -------------
Source: Government Debt Management Agency
(1) Calculated on the basis of exchange rates as of June 30, 2004.
T-10
-----------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information that is different from what is contained in this prospectus. You
should not assume that the information contained in this prospectus is accurate
as of any date other than the date of this prospectus. This prospectus is not an
offer to sell or a solicitation of an offer to buy any of our debt securities in
any jurisdiction in which such offer or solicitation would be unlawful.
-----------------------------
[National Symbol of Hungary]
Republic of Hungary
Prospectus
Dated November 12, 2004
PRINCIPAL OFFICE OF
AUTHORIZED AGENT IN THE UNITED STATES OF
THE REPUBLIC OF HUNGARY
Embassy of the Republic of Hungary
Office of the Trade Commissioner
150 East 58th Street, 33rd Floor
New York, NY 10155
FISCAL AGENT, PAYING AGENT AND REGISTRAR
Citibank N.A.
5 Carmelite Street
London EC4Y 0PA
LEGAL ADVISORS
To the Republic of Hungary To the Republic of Hungary
as to United States Law as to the Law of Hungary
White & Case LLP Legal Department of the
1155 Avenue of the Americas Government Debt Management Agency
New York, NY 10036 Csalogany utca 9-11
H-1027 Budapest, Hungary
To the Underwriters To the Underwriters
as to United States Law as to the Law of Hungary
Cravath, Swaine & Moore LLP Dr. Eva Hegedus in association with
Worldwide Plaza Allen & Overy LLP
825 Eighth Avenue Madach Trade Center
New York, NY 10019-7475 Madach Imre utca 13-14
H-1075 Budapest, Hungary
[National Symbol of Hungary]