Financial Environment in Hungary
The Central Bank
The Act on the Central Bank was amended in 2001. The amendments reinforce the
Central Bank’s (National Bank of Hungary-Magyar Nemzeti Bank -MNB) autonomy and rule out any possibility of budgetary financing. The Act LVIII defines the achievement and maintenance of price stability as the primary objective of the NBH.
Inflation
In 2003 inflation was 4,7 per cent, in 2004 it has increased to about 6,8 % mainly due to tax rises because of the changes of the VAT system, to short term effects of the entry into the EU. According to the plans next year it will decrease to 4 %.
Monetary policy, Foreign Exchange Regulations
The Hungarian forint (HUF) became convertible for essentially all business transactions within Hungary on January 1, 1996. Hungary complies with Article VIII of the IMF and all OECD convertibility requirements. In 2001, Hungary eliminated any remaining capital controls and changed its foreign exchange regime.
According to the Act LVIII of 2001 on the National Bank of Hungary, the government and the NBH mutually decide on the parameters of the exchange rate regime.
Hungary abandoned the narrow-band crawling peg, and currently adopts a substantially broadened – from +/-2,25 % to +/-15 % - intervention band which has allowed a substantial appreciation of the forint in recent years.
Market forces determine the exchange rate movements in the fluctuation band. If the exchange rate reaches the edges of the band, the Central Bank, according to its obligation, will keep the exchange rate within the band with the help of foreign exchange market intervention.
The current Hungarian exchange rate regime, considering its main characteristics, is compatible with the ERM II. regime, in which every country striving to join the EMU has to participate for at least two years before introducing the euro. Hungary is the only country among the new EU members to have introduced a currency system prior to adoption of the euro, which meets these criteria.
As of June 2001 a government decree lifted virtually all restrictions on foreign currency transactions. This is a significant policy change because over the past 70 years the National Bank, in its capacity as a foreign exchange authority, tightly controlled all foreign exchange transactions. A summary of the major changes is as follows:
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Short term portfolio transactions, hedging, short and long term credit transactions, financial securities, assignments and acknowledgment of debt may now be carried out without any limitation or declaration

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Forint remains the legal tender in Hungary, but domestic and foreign I individuals or legal entities may settle financial obligations in foreign currency.
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Domestic individuals and legal entities are no longer obliged to take foreign loans through bank transfers.
In early 2003, the government introduced special monetary policy measures which included a devaluation of the forint by 2,2 per cent, with the lowering of the central point of its 30 per cent trading band against the euro to 267,1 forint per euro. These measures were designed to boost the competitiveness of Hungarian exports and rein in consumer spending. However, by mid – 2003 the government was forced to act to defend the value of the forint and combat inflation. The NBH raised interest rates to
12,5 per cent. At the end of 2004 the level of the interest rate has been cut to 10,0
%.
Hungary has a favourable debt management record and is one of only a few former communist Eastern European states not to have received debt relief assistance from international community since 1991. Total foreign debt in 2003 amounted to 51 Bn
USD.
The Hungarian government is planning to fulfil the criteria for the adoption of the euro by 2008, and to adopt the euro in 2010.
The Banking System
The National Bank of Hungary (MNB) exercises a large influence on the banking sector and the monetary policy of Hungary. MNB has ended most of its commercial functions, but continues to relend loans from abroad to domestic banks. Forint is fully convertible and is freely traded on currency markets. The MNB relies primarily on two instruments to control the country’s economy via the banking sector: setting the size of mandatory reserves for commercial banks, and setting leading interest rates.
The banking system, along with the capital market, the insurance and pension fund markets, is controlled by one authority: the Hungarian Financial Supervisory
Authority, created by the merger of three supervisory bodies in April 2000.
Hungary’s legislation has opted for “universal banking”. Since 1999 banks with appropriate licenses are entitled to provide the full range of security transactions, including trade in stocks and publicly placed corporate bonds, in addition to commercial banking services.
The 1996 Credit Institutions and Financial Businesses Act secured the safe operation of the financial sector, harmonized Hungarian banking laws with EU standards, and introduced universal banking.
Foreigners do not need the Government’s approval to establish bank subsidiaries or to establish more than a 10 percent stake in existing banks. Foreign or Hungarian credit institutions, insurance institutions, and investment companies may own up to
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100 percent of a financial institution in Hungary. The minimum share capital requirement for the founding of a bank is HUF 2 billion.
Since January 1998, foreign banks can establish branches in Hungary offering crossthe-border financial services. Wholly owned subsidiaries or branches of foreign banks are acquiring an increasingly larger share of the market. Furthermore, there is a clear tendency for consolidation in the sector as a number of small banks have been bought or merged with larger banks.
Foreign-owned subsidiaries often have a competitive edge over Hungarian banks in customer service, although Hungarian banks have recently been able to develop and promote retail instruments to service their clients. Hungary's retail sector is still largely a cash-based economy and checks are not generally used; nonetheless ATM machines have become widespread. Credit card use is becoming more common, particularly in Budapest.
As the Hungarian banking system is developing, new types of credit/financial institutions are entering the marketplace including the first mortgage banks and several home-savings institutions. Several companies provide business/financial information, credit reports and investment rating.
Mergers have strongly influenced the banking industry in Hungary; Hungary’s largest bank was the creation of a 2001 merger between K & H Bank and ABN AMRO Bank.
The Hungarian government continues to hold equity in a few credit/specialized financial institutions. These include the Hungarian Ex-Im Bank (100 percent),
Hungarian Development Bank (100 percent). About two third of the banks are in foreign ownership.
The largest banks in Hungary (by total assets): OTP Bank, K&H Commercial and
Credit Bank, Daewoo Bank, MKB Hungarian Foreign Commercial Bank, CIB Bank,
Raffeisen Bank.
Capital market
Capital is available for businesses, due in part to greater foreign presence and greater competition. Foreign investors have equal access to credit on the local market, with the exception of special governmental credit concessions, such as small business loans.
The Hungarian Financial Supervisory Authority exercises control of the operation of general and specialized credit institutions, financial enterprises, insurance and securities companies, investment funds and the stock and commodity exchanges.
The Budapest Stock Exchange (BSE) - the first of the former socialist Central and
Eastern European exchanges to reopen in 1990 - is a full member of the Federation of International Stock Exchanges and an associate member of the International
Securities Market Association.
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Foreign investors can buy any forint-denominated government bonds of any maturity and foreign investment funds can establish offices in Hungary in order to attract additional Hungarian investors.
In recent years, capital has become more available for businesses, due in part to greater foreign presence, falling interest rates, and increasing competition. Foreign investors have equal access to credit on the local market, the only exceptions being special government credits (such as small business loans) and European Union and international financial organizations, which may provide loans to Hungarian businesses only.
Financing via issuance of corporate bonds is very limited, as the corporate bond market hardly exists. Only blue-chip companies and local subsidiaries of multinationals have issued corporate bonds in Hungary.
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