Hungary—Selected Issues
Author: International Monetary Fund
Publication Date:
15 Oct 1996
eISBN:
9781451817829
Language:
English
Keywords:
ISCR; CR; privatization; firm; Hungary; privatization program; APV Rt holding; AFV Rt's shareholding; majority holding; APV Rt's shareholding; Small and medium enterprises
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This Selected Issues paper analyzes empirically the main determinants of Hungary’s inflation rate during 1990–96. Although there exist a number of possible methodologies to analyze this issue, the one proposed in the paper takes explicit account of the time-series properties of the variables that are potential candidates for explaining Hungary’s inflation performance. This leads to the specification of a long-term equation, linking consumer prices to a number of macroeconomic variables as well as to proxies for relative price shocks. The paper also examines the external current account and net foreign assets in Hungary.

Abstract

This Selected Issues paper analyzes empirically the main determinants of Hungary’s inflation rate during 1990–96. Although there exist a number of possible methodologies to analyze this issue, the one proposed in the paper takes explicit account of the time-series properties of the variables that are potential candidates for explaining Hungary’s inflation performance. This leads to the specification of a long-term equation, linking consumer prices to a number of macroeconomic variables as well as to proxies for relative price shocks. The paper also examines the external current account and net foreign assets in Hungary.

V. Privatization: Regaining Momentum In 1995 1/

The current Government, which took office in July 1994, articulated its privatization strategy in a document published in late-1994. 2/ The main objective of this strategy was to divest the bulk of the state’s remaining shareholdings by end-1997. To facilitate this goal, a new privatization law was passed by Parliament on May 16, 1995. Concurrently, the government established a new state holding and privatization company (APV Rt), charged with carrying out the privatization process under the new law. 3/

The passage of the law and the establishment of APV Rt revived the privatization process, which had slowed to a trickle in 1994. There was a remarkable acceleration of privatization in late-1995, including a breakthrough with the divestiture of the utility sector. The key features of the new law are presented below, followed by details of privatization undertaken during 1995 and the prospects for 1996 and 1997. The final section discusses the privatization of the banking system.

1. Key features of the new privatization law

The Government had equity holdings in about 900 companies at the beginning of 1995. The new law provides for a broadening of the privatization base by reducing the number of companies in which the state is mandated to have a minimum equity holding from 252 to 161. Moreover, the law requires that 46 companies remain fully state-owned, including the postal service, the railways, and the national parks. The Government intends to exploit the law to its full extent, reducing the number of companies in which it has equity holding to the legal minimum, and lowering to 25-50 percent, the public stake in the 115 companies in which full control is not required. 4/ In terms of equity, the new law enables APV Rt to divest about Ft 1.2 billion of its initial Ft 1.6 billion shareholding (Table 13), Ft 0.5 billion more than that envisaged under the previous law.

Table 13.

HUNGARY: APV Rt Initial Shareholdings in Enterprises, June 1995 1/

article image
Sources: APV Rt; and World Bank.

Does not include AFV Rt’s shareholdings in banks or Ministries’ shareholdings of enterprises.

MVM equity presented here reflects the reduction by a share portfolio swap between MVM and APV Rt on 12/29/1995.

Includes MATAV, MVM, Power Distribution, Power Generation, MOL, Gas Distribution, and Antenna Hungaria.

In terms of the modalities of privatization, the guiding principles are similar to those followed since 1989, with the emphasis on competitive bidding and cash payments. The law specifies procedures for invitation, tendering, evaluation, and the announcement of the tender results. To ensure transparency, APV Rt is required to make public the reasons for its decisions regarding bids. An important feature of APV Rt’s rules is that no minimum price is enforced for tenders and auctions. 1/

In terms of the specifics, the new law distinguishes between three groups of enterprises. First, the large companies in which APV Rt has a majority holding will be divested through a tendering process, subject to certain exceptions. Second, there is a simplified, two-round, procedure for privatizing the small- and medium-sized enterprises 2/ in which APV Rt has a majority holding. 3/ Third, for all enterprises in which APV Rt has a minority holding, the shares are to be offered to any current private owners, and then to the enterprise itself, before being sold by auction or public tender.

2. Privatization in 1995

Soon after its inception, APV Rt established an enviable record in privatization. During the second half of 1995, it disposed of Ft 440 billion (8 percent of GDP) of assets (Tables 13 and 14) compared to a total privatization income of Ft 22 billion (0.5 percent of GDP) in 1994. Most of the income was raised by selling large enterprises in the energy and infrastructure sectors to, mainly foreign, strategic and financial investors; some 95 percent of the privatization income in 1995 was in foreign currency. Although the number of companies in which APV Rt had any shareholding was reduced by 84 during 1995, most of the privatization revenue in that year was raised by partially divesting the state shareholding in six major areas (Tables 13 and 14). This included the sale of:

Table 14.

HUNGARY: APV Rt End-1995 Shareholdings in Enterprises 1/

article image
Sources: APV Rt; and World Bank.

Does not include APV Rt’s shareholdings in banks and Antenna Hungaria.

  • (i) just less than 50 percent of the six electricity distribution companies (raising about Ft 118 billion);

  • (ii) a majority stake of 60 percent in the Budapest Bank (some Ft 85 billion);

  • (iii) a minority stake of some 30 percent in the oil company MOL (Ft 83 billion);

  • (iv) an additional 40 percent stake in the telecommunications company MATAV (Ft 74 billion), bringing its private ownership to some 70 percent;

  • (v) a majority stake in each of the five regional gas distribution companies (Ft 34 billion); and

  • (vi) a minority shareholding in two non-nuclear power generators (Ft 31 billion).

The privatization of the energy sector was facilitated by substantial price increases in 1995. Gas and electricity prices were increased by 21 percent and 31 percent respectively in January 1996. 1/ In addition, the Government announced a schedule of price increases for 1996. The price increases are aimed at ensuring an 8 percent rate of return for the utilities.

During 1995, APV Rt attempted unsuccessfully to divest 24 percent of MVM (the owner of the electricity grid and the Paks nuclear plant); as well as 50 percent of Antenna Hungaria, the broadcasting company. In addition, tenders were issued for another five power generation companies but the sales were not completed.

3. Privatization in 1996 and beyond

The revenue from the 1995 wave of privatization amounts to some two-thirds of the total cash revenues that can be expected from the entire 1995-97 privatization program (Table 15). Therefore, additional revenue during 1996-97 period will be limited. This is already evident in 1996: between January and May this year, APV Rt earned cash revenues of only Ft 34 billion, of which Ft 22 billion was in foreign exchange. For 1996 as a whole, privatization revenue is expected to amount to Ft 144 billion (2.1 percent of GDP) and decelerate further to some Ft 50-100 million in 1997 (0.6-1.2 percent of GDP). This decline in privatization revenue reflects both the fact that most large “blue chip” companies have already been sold, and that a significant portion of the remaining shares in the gas and electricity distribution companies as well as MATAV will be transferred to local authorities, offered to employees, or exchanged for compensation coupons.

Table 15.

HUNGARY: Projected APV Rt Financial Operations, 1995

(In billions of forint)

article image
Source: Data provided by the Hungarian authorities; staff estimates; and World Bank.

In addition to the large number of small- and medium-sized enterprises to be sold, the remaining major APV Rt shareholdings to be offered during 1996-97 include: (i) an additional 43 percent of MOL; (ii) re-offer of the remaining five power generation companies; (iii) MVM, though no decision has been made on whether to sell the Paks nuclear power plant; (iv) divestiture of the remaining state holding in the gas and electricity distribution companies while retaining a “golden share”; 1/ (v) Antenna Hungaria; and (vi) any remaining shareholding in MATAV which has not been transferred to local authorities. APV Rt also intends to divest all its shares in small enterprises by end-1996.

4. Bank privatization

The new privatization law eliminates the previous mandated minimum state shareholding in all banks, except the National Savings Bank (OTP). In the latter the mandated minimum shareholding is reduced to 25 percent plus one vote. Until the passage of the new privatization law, the state had majority shareholding in four of the six large banks: OTP, the Budapest Bank (BB), the Hungarian Credit Bank (MHB), and the Commercial Bank (K&H). 2/ In fact, the state had increased its involvement in these banks through a process of bank recapitalization during 1993-94 (see Chapter VI of SM/95/51). The Ministry of Finance owns the state shares in consolidated banks and is ultimately responsible for their privatization while APV Rt holds the portfolio of smaller state banks.

Soon after the passage of the new privatization law, majority control in OTP was transferred to the private sector through private placements, public offerings, and management and employee buy-outs. 3/ The majority holding in Budapest Bank was also sold to private investors (including EBRD) in late-1995. As a result of these two privatizations, the proportion of shares held by private owners in the banking sector increased to 60 percent at the end of 1995. Finally, in early-1996, the Hungarian Foreign Trade Bank (MKB) became wholly privately-owned when the remaining state minority holding was sold to one of the existing private shareholders.

The main challenge during the remainder of 1996 is to begin the privatization of the two large banks, MHB and K&H, which accounted for about 15 percent of banking assets in 1995. In May 1996, APV Rt took over the responsibility for preparing these two banks for privatization from the MoF. 4/ To prepare for private ownership, K&H and MHB have developed, and are in the process of implementing, pre-privatization programs aimed at enhancing the effectiveness of the banks’ management; reducing operating costs; and improving risk management. 1/

In addition, the Government has provided in 1996 Ft 11 billion (0.2 percent of GDP) to facilitate the separation of the problematic assets of MHB into a work-out unit. As a result of this isolation exercise, MHB is left with a core “good bank” which appears to have a capital adequacy ratio of more than 8 percent. The bad assets of K&H were separated from the main bank in 1995 without state financial support; K&H has also made progress in reducing its portfolio of troubled loans, and in provisioning against the remaining bad loans. Its capital adequacy ratio is estimated at over 10 percent.

By the end of 1996, APV Rt intends to offer, possibly to a strategic investor, the entire state equity in MHB. It also intends to launch the K&H shares in both domestic and foreign stock markets later this year, and complete its privatization next year.

The privatization of the smaller banks is more problematic. Unlike other banks, these banks did not benefit from recapitalization by government to 8 percent during 1994. In fact, the government has now decided to liquidate two of the smaller banks: Iparbank and Dunabank. In addition, Agrobank and Mezobank, which serve the agricultural sector, were merged into a new Mezobank. The latter has received Ft 6 in 1995 billion (0.1 percent of GDP) from the government for recapitalization. This new bank is in the process of preparing a pre-privatization plan similar to that of MHB and K&H. Privatization plans for two other banks, Takarekbank and the Hungarian Investment and Development Bank (MBFB Rt), are also expected to be adopted, but not before the end of 1996. 2/

1/

Prepared by Reza Moghadam.

2/

“The Privatization Strategy of the Government of Hungary, 1994-1998”, Budapest, November 11, 1994.

3/

APV Rt was formed through a merger of the State Property Agency (AVU), which was previously in charge of privatization, and the Hungarian State Holding Company (AV Rt), which managed those companies that were expected to remain state-owned on a long-term basis.

4/

These enterprises comprise of public utility service providers and companies regarded as strategically important such as defence companies.

1/

To ensure the accountability of APV Rt, the new institution comes under the control of the Minister for Privatization who also appoints the Chairman; however, Parliament appoints six individuals to the board of APV Rt.

2/

These are defined as companies whose equity, in 1994, did not exceed Ft 500 million and whose workforce was on average less than 500.

3/

For these enterprises, in the first round of tendering, only cash bids are accepted, while the second round is open to employee buy-outs, payments by installments, and noncash bidding. The latter could include compensation coupons (issued as compensation for past confiscation of property and personal losses); leasing; and Existence-loans (whereby the purchase is facilitated by a bank loan with a preferential rate).

1/

There was also an 8 percent increase in both electricity and gas prices in September 1995.

1/

The golden share does not allow the government to intervene in the operations of the companies. The government’s right to intervene is confined to decisions involving changes of statutes or other major activities such as mergers.

2/

The other two major banks are the Hungarian Foreign Trade Bank (MKB), and Postabank. MKB was privatized in 1994 and Postabank was set up as a majority private bank.

3/

Total voting shares held by the private sector amount to 51 percent. The central government now has control of 27 percent and the remaining 22 percent are held by the Social Security and Health Funds and the local authorities.

4/

The responsibility for privatizing of two smaller banks, Mezobank and Takarekbank, was also shifted to APV Rt.

1/

The World Bank has been closely involved in this process in the context of preparing an Enterprise and Financial Sector Restructuring Loan.

2/

MBFBRt is receiving assistance from EU/PHARE.

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Cover IMF Staff Country Reports
Hungary: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 1996: Issue 109
Publisher:
International Monetary Fund
ISBN:
9781451817829
ISSN:
1934-7685
Pages:
110
DOI:
https://doi.org/10.5089/9781451817829.002