Banker and former finance minister Peter Medgyessy does not belong to any political party. The MSZP elected Medgyessy in 2001 as its candidate for prime minister to resolve a political crisis that was sparked off by internal disputes. He is committed to ensuring that the country joins the EU in 2004 and the euro-zone in 2007. He has also pledged to repair ties with Hungary's central and east European neighbours after former prime minister Viktor Orban's nationalist policies and rhetoric damaged the country's regional relations.
The Hungarian Socialist Party (MSZP) & Alliance of Free Democrats (SzDSz)
The MSZP and the SzDSZ formed a coalition after the MSZP won only 46% of the April 2002 vote and Fidesz obtained 49%. The MSZP-SzDSz partnership has given the coalition ten more seats in parliament than Fidesz. The government is committed to policies and reforms that are favourable to business. The MSZP-SzDSZ coalition has launched an expensive programme aimed at reducing poverty, increasing public workers' salaries and pensions and a tax cut for the lowest-paid employees. The coalition can be expected to stay in office for a full four-year term.
The Hungarian Citizens' Party (Fidesz) - Hungarian Democratic Forum (MDF)
Fidesz-MDF narrowly won the April 2002 general election, but the MSZP and the SzDSZ formed a coalition to have a parliamentary majority. Fidesz-MDF was elected in 1998, with party leader Viktor Orban taking the post of prime minister. Fidesz and Orban were accused of following a path of nationalism and alienating Hungary from its eastern European neighbours. During its term in office, Fidesz lost many supporters because of its isolationist policies. A new conservative party called Centrum was founded in 2002 to attract voters who were disillusioned with Fidesz. However, Fidesz will remain the largest and most important opposition party.
KEY FACTS
The Republic of Hungary is a unitary state and parliamentary democracy. Real power resides in the 386-seat National Assembly, whose members are elected by proportional representation every four years. The Assembly elects the cabinet, which is headed by a prime minister. The last National Assembly elections took place in April 2002. Close election results suggest that the country is moving towards a two-party system. The president, who is elected by parliament for four years, has largely symbolic powers. The next presidential elections are scheduled for 2004.
KEY POLITICAL FIGURES
Head of state
President Ferenc Madl (SzDSz)
Prime minister
Peter Medgyessy
Government
Coalition between MSZP (Hungarian Socialist Party) and SzDSz (Alliance of Free Democrats)
Other parties
Hungarian Citizens' Party (Fidesz); Hungarian Democratic Forum (MDF); Independent Smallholders' Party (FGKP); Christian Democratic People's Party (KDNP); Hungarian People's Party (MNP); Worker's Party (Munkaspart); Hungarian Justice and Life Party (MIEP)
KEY ISSUES
EU accession
All the mainstream political parties have supported Hungary’s EU accession. This policy goal will be achieved in May 2004, though entry into the single currency euro-zone is unlikely until after 2008. 84% of voters in the April 2003 referendum endorsed the country's EU accession bid. The referendum had been expected to produce an affirmative vote because the country has long been one of the most proactive EU candidate states, with one of the most stable and progressive political systems
POLITICAL STABILITY
Hungary has progressed towards political freedoms and economic reforms since the fall of the communist regime in 1989. Most Hungarian political parties are mature democratic forces that guarantee political stability regardless of government changes.
In both rounds of the general election in April 2002, election results were extremely close between the MSZP and the then-ruling Fidesz-MDF coalition. This suggests that Hungary is moving towards a stable two-party system. The current government is likely to serve out a full term in office.
In elections in April 2002, the Hungarian Socialist Party - Alliance of Free Democrats (MSZP-SzDSz) coalition gained 198 of the 386 available seats, four more than the number needed for an overall majority and ten more than Fidesz-MDF. The parties signed a coalition agreement following the election after the MSZP failed to win more seats than Fidesz-MDF. Prime Minister Peter Medgyessy has faced bitter controversy about his previous employment with the communist-era security services. The MDF accuses Fidesz of trying to debunk the Socialist party and discredit its politicians. Fighting between the two parties is likely to continue as their support bases are very close.
Most investors' worries over the general elections were calmed after the first round, when the extremist far-right Justice and Life Party (MIEP) failed to gained the necessary 5% to gain parliamentary representation. The MIEP has been accused of a hard-line approach that could alienate the country from its neighbours. The party has previously stated that, if it were elected, it would expel foreign companies and investors. Investors were generally comfortable with either a Fidesz-MDF or an MSZP win because both parties have reasonable and pro-investment economic policies.
ECONOMIC STABILITY
Despite the bitter political atmosphere, the investment climate will remain favourable for investors. Hungary continues to be considered one of the most mature economy of all the transition states in Eastern Europe. However, over the last year the economy has been significantly weakened by increasing budget deficits, rising inflation, upward pressure on interest rates and a highly volatile currency (forint). This has prompted increasing investor concern about the government's fiscal and monetary policy, in effect further weakening the forint's standing on the international capital markets. Moreover, increasing labour costs remain a concern for investors. Annual average labour costs increased by around 18% in 2001 and 2002.
Key economic indicators
The economy has sustained relatively high economic growth rates in recent years. Real GDP growth remained stable around 3.0% in 2002 and 2003, and the outlook is positive, with a projected increase to 3.3% in 2004 and 3.8% in 2005. Despite increasing real wages, annual inflation rates have remained stable around 5% in recent years, though the rate is expected to increase to around 7% in 2004. In comparison with its neighbouring countries, the unemployment rate remains low in Hungary, fluctuating around 6%.
Critical budget deficit
The government will have to reduce the budget deficit to less than 3% of GDP if the country is to meet the euro convergence criteria. However, preliminary data suggest that the 2003 deficit will reach 5.6% of GDP, significantly exceeding the planned target of 4.5%. As a consequence of the 2003 overshoot, the government's planned 2004 deficit of 3.8% already appears too optimistic. Increasing inflation, combined with the weakness of the forint, is likely to put upward pressure on interest rates, which are already the highest among the countries that will enter the EU in May, at around 12.5%.
The current economic problems were largely inherited from the previous administration, which allowed a critical budget deficit to develop in order to finance steep increases in wages around the time of the 2002 parliamentary elections. This led to a significant increase in imports, which contributed to a high current-account deficit.
The prime minister and the new finance minister will face a dilemma over economic policy; on one hand they will have to implement unpopular austerity measures, while on the other hand they will be under pressure from the electorate and members of the MSZP to improve the standard of living ahead of parliamentary elections in 2006.
Foreign investment
Despite allegations of maintaining isolationist policies, the former governing Fidesz was successful in attracting large foreign investment projects. Of the 50 largest multinationals worldwide, 40 operate in Hungary.
FDI is concentrated in Budapest and western Hungary, mostly as a result of more advanced infrastructure in those regions. However, EU accession and the MSZP’s reforms will increase wages, which will force many foreign investors to consider relocating to eastern Hungary or other eastern European or Balkan countries, where wage expectations and living costs are lower.
The economy remains at least partly unbalanced. Foreign companies are somewhat isolated from the economic mainstream, with some two-thirds of the workforce employed by small or medium-sized companies rather than larger organisations, which have been sold abroad. Consequently, there are a few highly-efficient foreign companies that are detached from the bulk of industry - a tendency exacerbated by the location of many foreign companies in industrial parks. This imbalance is also reflected in the economy's continued reliance on industry.
OPERATIONAL ISSUES
Infrastructure
The infrastructure is well-developed and reaches Western standards. The country is well-served by a network of major roads and motorways. The government has recently launched a reconstruction programme to develop all major motorways into four-lane routes to ease congestion in and around major cities. The state-owned rail network is reliable and well-used. Hungary is in the heart of continental Europe, making it a potential transport hub for companies transporting goods from the east to the west and vice versa.
Legal system
As elsewhere in the former Soviet bloc, immature tax and legal systems hamper foreign investment. Although the situation is improving, many laws remain poorly-worded and are open to contradictory interpretations. Reform of commercial law is largely complete and is in harmony with EU law. However, effective implementation of the new laws will take several years. Delays in processing court cases are a problem.
Corruption
Corruption is not a serious problem or institutionalised within the government. However, lower government administrative officials do sometimes demand bribes. It is common for people to pay petty bureaucrats small bribes in return for services, such as the quick installation of a telephone line. Foreign business personnel could encounter requests for bribes in everyday dealings with public officials.
The government's stance on corruption has toughened in recent years and business personnel should not accede to bribery demands from government employees. In general, personal contacts within the same office will eliminate the need for unofficial payments.
Red tape
Dealing with zealous officials remains a major problem for business. More reforms are needed to reduce the bureaucracy.
Labour unrest
Although market reforms have reduced many people's living standards and boosted inflation and unemployment, manifestations of popular discontent have been rare and peaceful. In recent years, sporadic examples of industrial action have usually involved public sector employees, such as aircraft servicing staff in February 2001. Such protests may become more frequent if the government maintains austerity measures.
Trade unions in public sectors are more organised and powerful than those in the private sector.
Environmentalism
As is the case for other eastern European states, Hungary has acute environmental problems. Environmental issues are likely to become more important as Hungary's attempts to the join the EU lead to the imposition of strict anti-pollution standards. Hungarians became more aware of cross-border environmental problems following a environmental disaster in Romania early in 2000, which polluted the waters of the Tisza river. The Hungarian government is challenging the Australian company responsible for the accident in Hungarian, Romanian and Australian courts.
EXTERNAL RELATIONS
More than one-third of ethnic Hungarians live outside Hungary, including 400,000 in the Serbian province of Vojvodina. The conflict in Yugoslavia (Serbia and Montenegro) has made the issue of Hungarians in Vojvodina particularly sensitive, though the Yugoslav leadership that came to power late in 2000 is much more respectful of the Hungarian minority, which was instrumental in overthrowing the previous regime.
Hungarians in Romania are a cause of concern because of the growing popularity of Romanian nationalist parties, which oppose minority rights in the areas of Transylvania that have a large Hungarian minority. The Hungarian government in 2001 passed the so-called ‘staus law’, which gives preferential treatment to ethnic Hungarians living in Romania, Slovakia, Austria, Yugoslavia, Slovenia and Ukraine. It has been controversial with the Romanian government as ethnic Hungarians with Romanian citizenship have access to benefits, such as work permits, that are unavailable to Romanian citizens of other ethnic backgrounds.
The Hungarian minority in Slovakia is less problematic, as the largest Hungarian party is part of the governing coalition.
CRIMECrime levels have increased constantly since 1989. Street crime - particularly pickpocketing - is a problem, especially in Budapest, despite police claims that the level of pickpocketing has fallen in recent years. The fall is attributed to the arrest of several major pickpocketing gangs. However, an estimated 600 full-time pickpockets operate in public places in Budapest and 50% of their victims are foreigners. The Budapest police has a specific branch dedicated to deal with crimes against foreigners.
Violent crime is rare.
Factory theft
Pilfering from factories and other business premises is a long-standing problem in eastern Europe. It was common during the communist era, when workers boosted low wages by opportunistically stealing goods and selling them on the black market. Some experts estimate that up to 15% of goods made in Hungarian factories are stolen. Foreign companies have in recent years greatly reduced this type of crime by introducing metal detectors and security guards at the entrances of their premises.
Vehicle theft
The incidence of car theft has been steadily decreasing since 1998, but car crime remains a serious problem. Expensive Western cars are particularly vulnerable because gangs steal them for resale in Bulgaria, Romania and Ukraine. Approximately 80% of car thefts in Hungary occur in Budapest. Thieves tend to target wealthier parts of the city, such as districts 1, 2, 3, 11, 12 and 14. Mercedes Benz, BMW, Audi, Volkswagen and Opel are among the most sought-after car makes. Most vehicles are stolen while they are unattended. Weapons are hard to acquire and therefore there is a low risk of car-jacking.
Public disorder
Public disorder is rare; specific incidents usually spark off outbreaks.
ORGANISED CRIMEOrganised crime is only a peripheral security threat to foreign companies. Criminal gangs are generally small and relatively unsophisticated. They tend to concentrate on drug-trafficking; car theft; prostitution; and smuggling of people, alcohol and cigarettes. Economic crime is generally carried out by transnational criminal organisations and by individuals.
Organised criminals from the FSU are active in Hungary: the Russian 'mafia' has made Budapest the centre of its east European operations. Crime gangs are more interested in securing Hungary as a transit point from which smuggle goods can pass from the FSU to Western Europe.
Although criminal groups seldom target foreign companies, companies should conduct effective due diligence on prospective partners. Financial institutions should be particularly aware of the rise in money-laundering. The government is discussing a new body to co-ordinate actions against organised crime that would unite border guards with other institutions that often fail to work together effectively.
The problem should be put into perspective: organised crime is not nearly as much of a threat in Hungary as in Ukraine and Russia. Foreign citizens engaged in legitimate business are unlikely to be targeted. EU accession, including the harmonisation of law enforcement and legal prodcedures with those of the EU, will ensure that the problem does not go unchecked and the legitimate businesses continue to operate safely.
KIDNAPPING AND EXTORTIONKidnaps are unusual.
Organised crime is most likely to impinge on foreign business in the form of extortion demands. Gangs have tended to concentrate on local companies, but the number of incidents targeting foreign companies has increased. Recent sporadic bomb attacks indicate that criminal gangs use violence to back up their demands. However, they have not used violence against multinational companies.
VIOLENT GROUPSOrganised criminal gangs
Feuding between organised criminal gangs has prompted a number of bomb attacks. Criminals are more likely to target local rather than foreign firms for extortion.
Far-right extremists
As elsewhere in eastern Europe, racism and far-right tendencies are resurfacing, primarily because of an influx of economic migrants and refugees from the Balkans and other eastern European states. Many people blame social problems - particularly rising crime - on the ill-educated and often unemployed Romanies (gypsies), who face widespread harassment despite laws safeguarding their rights.
There are an estimated 5,000 far-right 'skinheads' in Hungary, who mainly target the Romany population and economic migrants in arson attacks. There is evidence of growing links between these skinheads and neo-Nazi organisations in Austria, Germany and the US. Skinheads are believed responsible for a series of arson attacks against Romany property in recent years, the majority of which have caused damage but no injuries. Further small-scale attacks against Romanies or immigrants are likely. There is a slight risk that non-white foreign personnel may be targeted mistakenly.
TERRORISM
The country's support for the US-led war on terrorism and its military presence in Iraq and Afghanistan make it a possible target for a terrorist attack by Islamic extremists. However, the risk remains low because there are no known terrorist groups operating in the country and, moreover, there is no significant Muslim population where international extremists might find support or concealment. The country remains a less likely target than western European countries, where a terrorist attack would have greater political and symbolic significance.
Following the 11 March 2004 bombings in Madrid (Spain), the authorities increased security measures at border crossings, airports, railway stations, embassies, on public transport and in crowded places in major cities.
CONFLICTThere are no border tensions with neighbouring countries
FUNDAMENTALS
Visas
EU, US and Japanese nationals, among others, do not require a visa for visits of less than 90 days' duration. Visas are issued by local Hungarian embassies. Single- or double-entry visas are valid for six months and multiple-entry visas for a maximum of 1 year. Transit visas entitle the holder to stay for 48 hours.
Entry requirements
There are no mandatory vaccinations or tests.
METHOD OF TRAVEL
By air
Several major international airlines fly to Hungary, including Alitalia, Air France, British Airways, KLM and Lufthansa. The national carrier Malev offers a cost-effective and good alternative, despite financial difficulties; service standards are equivalent to those of Western airlines.
Major international airport
Budapest's Ferihegy Airport is the country's only major international airport.
Airport security
Security at Ferihegy is adequate. Many police officers patrol the airport: neither petty crime nor pilfering by baggage-handlers is common.
Airport procedures
Queues at customs and passport control may be long and English-speaking staff are not always available.
By land
Hungary's location in central Europe makes it easily accessible by road and rail. Budapest is connected with Prague (Czech Republic), Bratislava (Slovakia) and Bucharest (Romania), as well as destinations in Germany, Austria and Switzerland.
The four-and-a-half-hour hydrofoil journey along the Danube river to Vienna is beautiful; services run up to three times a day in the summer (June-August). Personnel are advised to buy tickets 24 hours in advance. Tickets can also be bought for similar trips to Bratislava.
