Hungary's Troubled Business Ties

Bureaucrats grapple with deficits, high unemployment, and new international demands

RECENT run-ins with the International Monetary Fund and the European Community as well as rocky relations with some foreign investors signal the difficulties even the most successful East European country can have in meeting Western expectations while establishing a market economy.

In a recent 12-page advertising supplement in Newsweek International, Hungary's Ministry of International Economic Relations (MIER) notes that Hungary attracted 60 percent of direct foreign investment in east-central Europe; enjoys the presence of some 50,000 registered companies, up from 15,000 in 1989; and recently won interim associate membership in the EC.

But despite a vigorous campaign to promote a "friendly partner" image, Hungary has had difficulty meeting the expectations of new international partners.

Ending two weeks of negotiations here, the IMF on July 3 said Hungary must tame its 1992 deficit, which the government says may reach $2.3 billion - 6 percent of Hungary's gross domestic product and more than twice the $897 million limit set by the IMF. On June 30, the Finance Ministry said that next year's deficit could reach $3.7 billion.

"A deficit that would be above 5 percent of GDP is, in my view, difficult to justify," said Jacques de Groote, who represents Hungary on the IMF's board of directors. "It would be difficult to sell to the board of the IMF and to public opinion in international financial circles."

Finance Minister Mihaly Kupa blames the deficit on an "unforeseen" slump in GDP and taxable income, the cost of unemployment benefits, and tax evasion.

Hungary has also run afoul of Brussels over a preferential tariff accord less than two months after its interim associate EC membership agreement took effect. On May 19, two ministries passed a decree which allowed the duty-free import of Ford's Transit van but kept in place an 18 percent levy on other vans. Minister of International Economic Relations Bela Kadar said the move was needed to show Western firms that there are rewards for investments here like Ford's new $100 million components plant.

Encouraging investors such as Ford seems sensible, if not urgent. Hungary's industrial production fell 21 percent last year, while the private Economic Research Institute predicts a further 8 percent to 9 percent drop this year. Unemployment of 522,707, or 9.7 percent, in May may reach 900,000 next year, the government said July 2.

Still, the French and Italian embassies, along with General Motors and Suzuki (both with plants here) and other car makers, protested that the decree violated a ban in Hungary's EC agreement on new import restrictions against member states.

On May 23 the EC agreed, and called on Hungary to equalize the van tariffs. The government conceded. Two days later, Ford official David Tassinari said the company's future investment here was not assured. While stressing that Ford and the government were "not fighting," he said that the firm had been "promised" the preference (a claim a MIER official denied).

"There will probably be some changes," Mr. Tassinari said, "but I would not like to speculate on those until they're officially announced, and how it will affect Ford's future investment policy."

"There are easier places in the world to do business than Hungary," he added.

Dealings with state institutions have irked other firms as well:

* Last year United Technologies subsidiary Pratt and Whitney signed what it calls a contract to sell jet engines worth $50 million to Malev, the state airline. The document contained a clause stating that it was legally binding, but Malev, calling it a "letter of intent," announced it would buy the engines from General Electric. Pratt and Whitney sued in a Hungarian court and won on Jan. 10. The case has been appealed.

* German metallurgy giant Metallgesellschaft AG last October pulled out of 60 percent stake in an ailing steel plant in Ozd, in northeast Hungary, claiming that its state partners demanded that it foot more than its contractual share of operating costs.

"We learned that contracts which were made at the time were not enforceable at another time," said Metallgesellschaft official Peter Giesler.

State Property Agency (SPA) spokesman Csaba Gelenyi refused to comment on the divestiture. The plant was renationalized and declared bankruptcy in April.

* After 18 months of negotiations, Colgate-Palmolive's bid to buy the debt-laden Caola Cosmetics was rejected. Although Colgate's bid for Caola's four plants was "the most serious," according to SPA officials, the agency refused to sell it on grounds it would not specify. Although the SPA subsequently ordered Caola's reappraisal, Colgate pulled out of negotiations.

"We didn't want to get into that again," said Colgate Hungary director Patrick Knight. "It was lengthy, it was expensive, it was involved, and it was unsuccessful. That chapter is closed."

By March, Caola was $3.8 million in debt and had stopped making 75 percent of its product line, the Hungarian News Agency reported.

The First Hungary Fund, Ltd., has profitably invested some $40 million here, said its chairman, Peter Reno. Although Mr. Reno fumes about SPA "bureaucrats," he has struck one deal with them and has five more on the table.

Charles Twyman, an American adviser to Hungary's SPA, points out that losing bidders tend to grumble in any country, and that the fledgling agency is still feeling its way as it unloads assets accumulated over 40 years of a command economy.

"The good news is, Hungarians seem to have complaints from everybody," Mr. Twyman said. "At least we're even-handed in not handling everything to everybody's satisfaction."

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