Country Profiles

Hungary
October 20, 2003

Economy

Despite the downward turn of world economies in recent years, Hungary has held its own. The Budapest Stock Exchange index (BUX) has risen over 1800 points, or almost 25%, since the beginning of 2003, while Hungary's 5.7% unemployment rate ranks below that of neighboring countries, as well as the European Union's average. Gross domestic product continues to rise, although at a lower rate than years past, rising 2.4% in the second quarter.

Hungary is scheduled to join the European Union next May, a move that was supported by all the major political parties, and has defined many recent economic reforms. The country has encouraged privatization and foreign investment since the fall of communism 13 years ago, and the private sector generates 80% of economic output. Prime Minister Pter Medgyessy has pledged to expand privatization of state-owned enterprises, after a deceleration of efforts under Viktor Orban's administration from 1998 to 2002.

Exchanges

The Budapest Stock Exchange is a joint stock company and is 60% owned by its 33 broker and broker-dealer members, with the remaining ownership held by outside investors. It is currently weighing measures to go public, though no target date is set. As of October 8, the exchange climbed over 300 points to 9,753.05, a 12 month rise of 45%, or 3,035 points, representing its highest level since April 2000.
BSE currently has 128 listed securities, and turnover for August was $636 million, with average daily turnover of $31.79 million for the month, down 41.4% from the same period in 2002.

The smaller Budapest Commodities Exchange has three general listings: the Grains Section, the Financial Section, and the Livestock Section. BCE began operating as a shareholder company in May 2003, with 600 million forint ($2.8 million) in capital. Currencies and futures are traded on the BCE, as well as the BSE. "That's a strange part of the Hungarian market, that currencies are traded on both exchanges," said Lilla Juranyi, director and head of securities services and financial institutions at ING. "The commodities exchange is a bit stronger on currencies than the stock market," she added.

Fixed Income

Government bonds comprised the vast majority of Hungary's fixed-income market, with foreign participation brisk. Approximately 50% of government bonds are held by foreign investors, said Endre Csillag, head of products and relations management for Citibank Global Securities Services, adding the corporate bond market is quite small and not very liquid. ING's Juranyi expects foreign investment in government bonds to increase after Hungary's accession to the European Union.

Government bonds can be traded on the BSE, but the over-the-counter market sees higher volumes, according to Juranyi, because most brokers prefer the flexibility of that market.

Clearing and Settlement

All securities are registered with the Central Clearing House & Depository, known by its Hungarian acronym, KELER, which celebrated its tenth anniversary earlier this month. KELER provides clearing, risk management, settlement and depositary services for all transactions on the BSE and BCE, as well as the OTC markets. KELER cleared and settled 80,000 OTC trades in 2002 with government securities composing 86.4% of the total number of transactions (93.5% by value). KELER is jointly owned by the National Bank of Hungary (50%), BSE (25%) and BCE (25%).

The settlement cycle for equities is T+3, and T+2 for government bonds. Negotiated deals on BSE are settled on a gross basis with cycle ranging between T+1 and T+7. All trades are settled in forints. Brokers may use either the Interbank Clearing System (GIRO) or VIBER, the Hungarian acronym for Real-Time Gross Settlement System, KELER introduced in 2000. KELER relies on delivery verses payment settlement. KELER holds the cash account of Hungarian brokers, while the National Bank of Hungary holds the cash account of most banks, and KELER sends instructions between itself and the National Bank using ISO 15022 SWIFT message formats. KELER also has a bilateral settlement link with Clearstream.

By law, corporate securities must be dematerialized by the end of next year. Privately held companies will still be allowed to deposit physical shares with KELER. "KELER is making a lot of developments and improvements into making trades more secure," said Juranyi. Among them is KELER's plan to centralize pre-matching through its counterparty system by next year. Currently trades are pre-matched between individual parties.

Custody

A number of global custodians such as ING and Citibank operate in Hungary, in addition players like Austria's Raiffeisen Bank and Germany's HypoVereinsbank have a presence in the region. KELER itself acts as the local custodian for Clearstream trades.

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