INTERNATIONAL INVESTMENT BANK

TRANSITION COUNTRY STRATEGY

Moscow, August 2015

Introduction

This Transition Country Strategy for Hungary (hereinafter – the Strategy or the Country Strategy)

is aimed at restoring the key elements of cooperation between the International Investment Bank

(hereinafter – the IIB, the Bank) and Hungary, taking into account the renewal of the country’s

membership in the Bank under the resolution adopted at the 102nd Meeting of the IIB Council (20-

21 November 2014, Sofia).

The Country Strategy for Hungary is drawn up based on the Bank’s Corporate Development

Strategy for 2013-2017 approved at the 97th Meeting of the IIB Council, and the IIB Business Plan

for 2013-2017.

The implementation of the Strategy should ensure the exploitation of the IIB’s full potential as a

multilateral bank for development to contribute towards Hungary’s social and economic

development, prosperity of its people and stronger trade and economic ties between the member

states of the Bank. The Strategy has been elaborated in full accordance with the IIB’s mission and

objectives and has taken on board the best practices in the field of strategic planning adopted by

multilateral banks for development.

Macroeconomic environment

In 2013, Hungarian GDP growth became balanced and this trend continued in the recent quarters.

Latest data confirm that Hungary is on the right track as the structure of GDP became stable and

sustainable. This is proven by the better and better growth dynamics of all sectors. It is important

to stress out that this dynamic growth rate has been achieved in parallel with favorable internal

and external balance path. Due to the positive trends, Hungarian GDP reached its pre-crisis level

by the end of 2014.

The expected slowdown of Hungarian GDP in the fourth quarter did not occur. Hungarian

economy grew by 3.4% year-over-year and by 0.8% compared to the previous quarter. Hungarian

GDP growth was the third strongest in the EU at an annual basis. This also means that fourth

quarter data was above market expectations. GDP growth amounted to 3.6% for the whole year.

In terms of GDP structure, the main contributors to economic performance were the productive

branches. Industrial production increased by 4% mainly due to the capacity expansions of both

automotive industry and its supply chain. Furthermore, construction rose by ca. 6.2% partly thanks

to infrastructural projects, and despite the high base period values agriculture contributed

significantly to GDP growth (+12.1% increase). Regarding market services, the performance of

tourism and retail sales (+13% and +6.5% in December) was outstanding in line with the

accelerating upturn of domestic demand. The value added of financial sector has also improved

due to the governmental actions towards a more efficiently operating banking sector. In total,

services increased by 2.4%.

On the expenditure side, the economic growth was mainly driven by the increasing domestic

demand, since both investments and consumption performed well. Households’ consumption

increased by 1.9%, which is supported by the low inflation environment and the favorable labor

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market trends (increasing employment and real wages). Low inflation environment is determined

by utility price cuts of government and low oil prices. Several factors played a significant role in

the expansion of investments (by +1.9%) such as the absorption of EU funds, the low yield

environment, the Funding for Growth Scheme and significant performance of corporations.

Despite the weak external demand, export dynamics also remained persistently high at the end of

2014 (+9.4%), which shows that the Hungarian economy has become more resistant to the cyclical

downturns of the EU. Still, the external demand for vehicles remained high in the EU. However,

due to the import content of gradually recovering domestic demand, net export contribution to

GDP growth was smaller than in previous years.

Macroeconomic outlook

From 2014 on – based on the positive progress started in 2013 – the structure of GDP growth

became more stable on all three sides. Furthermore, in the forecast horizon we assume that GDP

growth will be even more balanced. The GDP growth is also expected to remain sustainable, as

the government deficit target is well below 3%.

In light of recent macroeconomic data, it is worth mentioning that economic outlook improved

compared to previous expectations. Thus regarding growth progress, according to the

Convergence Programme of Hungary 2015-2018, the economy is likely to expand by 3.1% and

2.5% in 2015 and 2016 respectively. Domestic factors are also expected to determine

fundamentally the growth performance in the coming periods. Employment rate will increase

further. Households’ disposable income is likely to rise further supported by the salary increases

implemented in certain public sector areas, the low oil price level and the final settlement of issues

related to FX loans.

Besides consumption, further investment growth is expected this year supported by EU fund

absorption, the extended Funding for Growth Scheme and FGS+. Consequently, the investment

rate – which showed a strong recovery in the recent quarters – may persistently remain above 20%.

Finally, in terms of exports, the improvement of both export orders and sentiment indicators

suggest lasting positive tendencies in the forthcoming periods. Export growth is expected to remain

favorable thanks to the slowly improving external demand, which is also supported by the external

demand for vehicles. However, the contribution of net exports to GDP growth is expected to be

smaller compared to the previous years since the growth of imports is also likely to accelerate due

to increase of the domestic demand. The improvement of the balance of payments played a great

role in the significant reduction of external debt during the past years. The external financing

capacity is expected to be around an average of 7-8% of GDP over the forecast horizon, resulting

in a significant reduction of Hungary’s vulnerability in the coming years.

From 2016, economic growth will be further supported by several factors. The improvement of

growth outlook, tax reductions and tax allowance (mainly decrease of income tax, bank tax, VAT

on pork, increase of family tax allowance) generate additional income position for households and

corporations, which stimulate the boost of the domestic demand. Additionally, the cut of bank tax

also supports financial stability and the pick-up of credit supply.

Balanced economic growth will be coupled with moderate consumer price increase over the

forecast horizon resulting in a predictable economic environment for the economic agents. In 2014,

consumer prices stagnated mainly due to the cuts in energy prices and external disinflationary

pressure. The latter clearly keeps 2015 inflation at a low level as well. Without any further one-

off effects from 2016, inflation should accelerate, yet it is still expected to lag behind the national

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bank medium term target. As low internal and external effects fade out, inflation should reach 3%

(which is the medium term inflation target of the Hungarian Central Bank) by the end of 2017.

Investment climate

According to the Ease of Doing Business Benchmarks 2015, Hungary occupies 54th place amongst

189 countries of the world as to the level of business regulations, climbing four positions compared

to 2014. Hungary remains one of the most open ‘transition’ economies in Central and Eastern

Europe. Its exports level reaches 95% of GDP. Given that, Hungary is an important element of a

‘global value chain’ within international production processes. As part of this chain, Hungarian

industrial exports become components of goods exported by other countries.

International investors demonstrated a significantly increased interest to Hungary’s sovereign

bonds over the recent times; however, it does not seem to be consistent against the background of

low profitability and Hungary’s relatively low sovereign credit ratings. In fact, sovereign ratings

were improved (one-notch) by S&P in March 2015 and Fitch affirmed Hungary's long-term rating

at BB+ and revised the outlook to positive from stable in May 2015.

The course to ease monetary policy contributed significantly to the resumption of economic

growth. Commercial banks were able to offer new loans on more favourable terms, following the

reduction of the base interest rate to historical minimum by MNB. The launch and development

of FGS programme provided a resource base for SME finance (further information on this

programme is in Appendix 1). However, lack of commercial banks’ involvement in this

programme due to low profitability and increasing risks from non-performing loans became an

obstacle for further lending through the FGS. National institutions for development – Hungarian

Development Bank (MFB) and Hungarian Export-Import Bank (Eximbank) 1 – implement other

governmental measures alongside the FGS programme to foster economic growth and further

development of Hungarian economy.

The main contributor to assisted finance for SMEs, prior to the launch of the FGS, was Hungarian

Development Bank with its total portfolio of HUF 398.8 billion (EUR 1.26 billion) as of the end

of December 20142.

Hungary has been assigned sovereign credit ratings in foreign and national currencies by all

international ratings agencies. Although these are not currently investor grade ratings, it is worth

mentioning that since 2013, they have been stable and there are even implications for growth

should this positive trend of GDP growth remain.

Agency Rating Outlook Date

Standard & Poor’s BB+ Stable 20/03/2015

Moody’s Ba1 Stable 07/11/2014

Fitch Ratings BB+ Positive 22/05/2015

Creating a favourable business climate as well as encouraging competition will be of paramount

importance for increasing both investments and effectiveness. Amongst factors that encourage the

inflow of investments, including foreign contributions the following are worth mentioning:

1 Unites an export-import bank and ECA. 2 Recalculated at the exchange rate of 1EUR=316.59HUF as of 31.12.2014.

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resumed economic growth, stable sovereign credit ratings, national currency exchange

rate and inflation level;

absence of capital imports/exports restrictions;

national currency convertibility;

government’s measures to encourage exports and develop lending;

national and transnational institutions for development providing finance for long-term

infrastructure projects are in place

relatively well-educated and high-skilled workforce along with competitive salary

levels.

The country’s geographical position in the centre of Europe at the crossroads of the main European

transport routes (from Northern Germany/the North Sea to the Black Sea; from the ports of the

Adriatic Sea to Russia; the passage from the Baltic states to Turkey and Greece) is a key factor

contributing to its sustainable development and inclusion of its economy to international trade.

Industry

Hungary’s most advanced industry accounting for 90.6% of all the country’s production is

processing including car, machine and equipment manufacturing (42.6%), food processing

(15.0%) and petrochemicals (13.8%). Large factories (with over 300 employees) produce 2/3 of

all industrial products; industrial concentration process is underway, especially in car

manufacturing, power production and petrochemicals. National industry depends significantly

upon the state of international markets – exports account for 52% of all industrial manufacturing.

Large enterprises export from 60 to 80% of their outputs.

Car manufacturing is one of the key industries (over 700 businesses with 115 thousand employees)

and accounts for almost 18% total exports. Such companies as Mercedes-Benz, Audi, General

Motors and Suzuki have full-scale production lines in Hungary. The presence of large international

corporations attracts local equipment manufacturers and other suppliers. Beyond this large western

manufacturers (Audi, Bosch, Knorr-Bremse, ThyssenKrupp, Arvin Meritor, Denso, Continental,

Visteon, WET, Draxlmaier, Edag, Temic Telefunken and ZF are amongst them) open research

facilities and local workforce training and development centres, thus, positively affecting

employment levels.

Electronics industry is also one of the largest manufacturing sectors that accounts for 22% of total

production. Hungary is the largest electronics manufacturer in Central and Eastern Europe. About

112 000 are employed in this sector. Six out of ten largest electronics manufacturers have

production lines in the country’s territory (Jabil, Flextronics, Foxconn, Sanmina, Zollner and

Videoton are amongst them).

Although food processing share shrunk in the last decade, the industry remains among key

economic sectors and employs about 124 000. Hungary is one of the largest exporters of food and

agricultural produce in Central and Eastern Europe. Food industry produces 6% of the country’s

exports. Microbusinesses with less than 10 employees account for more than 85% of total food

processing operators. The industry’s foreign investments’ share reaches 47%. 2/3 out of 200 large

food producers is the businesses with foreign ownership. Large manufacturers mainly utilise

locally-sourced raw materials, thus boosting agricultural production. The largest foreign

companies that have production in Hungary are Bonduelle, Bunge, Givaudan, Globus, Mars,

Nestlé, POPZ and Unilever.

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The development of the country’s IT industry has been underway for the last several years. Even

during the recession of 2012 this sector showed a steady growth. About 150 thousand are currently

employed in the industry. Hungary became a regional ‘nursery’ for software development

including satnav systems, bioinformatics and IT security. Currently such companies as IBM,

Ericsson and Oracle Gameloft have their presence in Hungary.

Pharmaceuticals and medical products manufacturing are rapidly developing. Gedeon Richter,

EGIS (Servier), TEVA, Sanofi, GlaxoSmithKline, Coloplast, GE Healthcare, B.Braun, BD, Hoya,

Sauflon and Merck placed their production lines in the country. Among the companies that have

regional distribution centres are Pfizer, AstraZeneca, Mylan, Sanofi and Janssen-Cilag.

Banking sector

Development opportunities for Hungary’s banking system are coupled with significant credit risks

for banks that root in the quality of assets, profitability and capitalisation. Despite continuing

economic growth, Hungarian banks’ leverage share is forecast to decrease in 2015.

MNB is currently implementing complex measures aimed, on the one hand, at maintaining the

stability of banking sector and on the other – at encouraging business entities to borrow, for

instance, though FGS. Large share of non-performing loans on banks’ balance sheets is the effect

of the global financial crisis of 2008-2010 and, as a consequence, a sharp weakening of forint

against main foreign currencies against the background of a substantial share of foreign loans

received by Hungarian borrowers. Based on the data provided by MNB’s Financial Stability

Report of May 2015, the corporate NPL ratio had decreased to 15.6 per cent by the end of,

which is 2.9 percentage points lower than in the previous half-year. Within the overall banking

system's household loan portfolio the NPL ratio increased by 0.6 percentage points compared to

the end of the previous half-year, reaching 19.2 per cent at the end of the year.

A significant pressure on the capital of banks could be exerted by amendments to Hungarian

legislation adopted in July 2014. Under these amendments banks are required to disclose

information in loan agreements on their right to unilaterally adjust interest rates and, therefore, the

increased borrowing costs. Failure to comply will result in compensations to retail clients for their

additional costs. Banking system’s total costs might reach EUR 2.6 billion or about 28% of its

total capital.

Banking industry continues to follow the strategy of reducing costs and leverage amidst stagnating

demand for lending resources and unfavourable regulation. Reducing leverage within the banking

system impairs, in its turn, the possibility to achieve the MNB’s target to increase investment

activities within Hungary’s economy.

Cooperation with international financial institutions (IFI)

Hungary is a member of several international financial institutions such as the World Bank Group

(WBG)3, the European Investment Bank Group (EIB), the European Bank for Reconstruction and

Development (EBRD) and the Council of Europe Development Bank (CEB).

3 Hungary is a member of the International Bank for Reconstruction and Development (IBRD), the International

Development Association (IDA), International Financial Corporation (IFC), Multilateral Investment Guarantee

Agency (MIGA) and International Centre for Settlement of Investment Disputes (ICSID).

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World Bank Group (WBG)

The total amount of funds invested by the World Bank in the economy of Hungary reaches USD

1.4 billion4. Although Hungary graduated from the IBRD in 2007, it is an active partner of the

WBG through, inter alia, its contributions to select funds. Hungary’s contributions paid-in to the

WBG totalled USD 41 million for FY10-FY15 Q2.

European Investment Bank Group (EIB)

Since 1990, the EIB has been financing different government and non-government projects in

Hungary. In the past five years (2010-2014), the EIB financed projects by granting loans

approximately totaling EUR 6.14 billion.

The EIB finances primarily infrastructure, environmental protection, healthcare and education

projects. In 2013, two new loan facility agreements were signed between the Hungarian State and

the EIB for an aggregate principal amount of up to EUR 300 million. In 2014, two new loan facility

agreements were signed for an aggregate principal amount of up to HUF 67 billion. The EIB

approved loan agreements in the non-governmental sector in an amount of 506,4 million and

further 30 million euro for a municipality in 2014.

Industrial structure of EIB projects in Hungary between 2010- 20145

Council of Europe Development Bank (CEB)

Hungary joined the CEB in 1998. According to the CEB's social mandate, the focus of the CEB's

projected activity in Hungary is mainly the co-financing of EU-supported investments in 2007-

2013 and projects in the field of environmental protection, strengthening social integration and

developing human capital. Since Hungary’s accession the CEB has provided €1.94 billion

(57.25% of which was allocated to the public sector).

European Bank for Reconstruction and Development (EBRD)

The implementation of 169 investment projects for a total amount equivalent to EUR 2.7 billion

became the outcome of Hungary’s cooperation with the EBRD. Ten projects in the amount of EUR

600 million were financed in 2013.

4 Hungary graduated from the World Bank in 2007. In October 2008, the World Bank pledged EUR 1 billion in

support of the IMF-EU stabilization package for Hungary, but no utilisation has been initiated. 5 http://www.eib.org/projects/regions/european-union/hungary/index.htm

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Industrial structure of the EBRD projects in Hungary

35%

0%

24%

41%Energy

Financial sector

Manufacturing, agriculture

Infrastructure development

Hungarian Eximbank signed cooperation agreements with various financial institutions of the IIB

member states, including Trade and Development Bank of Mongolia, Roseximbank, Eximbank

Romania, Eximbank SR, Gazprombank and Bank of Moscow, and has strong ties with State

Corporation ‘Vnesheconombank’, Bulgarian Bank for Development and EXIAR.

Priorities for the country’s economic development

A medium-term programme for the development of Hungarian economy is drawn up on the basis

of the recommendations provided by the Organisation for Economic Co-operation and

Development (OECD) as well as in accordance with the EU Programme for member state

economic convergence. Key targets for the government’s economic policy6 are boosting a

sustainable economic growth by reducing the share of ‘shadow economy’, increasing employment

and lending activities as well as fostering demographic growth.

Key priorities for Hungary’s economic policy:

Increasing financial stability by retaining its sovereign debt growth on a downward path. At

present Hungary manages to meet EU requirements to keep its government deficit below 3%.

Increasing lending activities, primarily in the segment of SME finance: SME Development

Strategy for 2014-2020 approved by Hungarian government in January 2014 includes the

following benchmarks:

2% growth in gross value added produced by SME sector;

Exports should become a source for the minimum of 50% of revenues of small and

medium enterprises with more than 50 employees;

Increasing the number of SMEs exporting beyond the EU from current 1% to 3%;

Increasing the number of innovative SMEs from 20% to 30%;

Improving the activities of various entrepreneurial groups in accordance with bespoke

programmes tailor-made for them.

6 In accordance with National Reform Programme 2014 Government of Hungary, April 2014.

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Growth in export-import operations: Hungarian Eximbank provides substantial volumes of funds

for expanding export possibilities for national businesses. Eximbank’s loan portfolio reached HUF

509,5 billion at year-end 2014. Providing export insurance products alongside loan products

enables the government to achieve synergic effect of boosting external trade. Developing national

exports significantly contributes to the growth of national economy and, as a result, sustainability

and rise in employment.

Boosting finance for farming: Hungarian government is currently drawing up and preparing to

implement the programme of soft-term finance for agricultural sector, which is currently facing

the need to attract resources against the background of unsufficient transparency of their activities,

absence of audited financial statements, high lending costs and difficulties with collaterals for

attracted funds.

Boosting the effectiveness of financial supervision: Hungarian Financial Supervision Authority

was merged with the Hungarian Central Bank on 1 October 2013. Changes to the law on

liquidation procedures for banks in accordance with the EU legislation have come into force on 16

September 2014. Last year the Bank Resolution Fund and the Bank Resolution Authority (as part

of MNB) was set up as well. These contribute to enhancing the stability of Hungarian financial

sector.

Fiscal reform: Hungary initiated its fiscal system transformation by redistributing tax burden from

payroll funds to sales tax. The fiscal reform is aimed at increasing the competitiveness of

Hungarian economy and boosting employment.

Measures to reduce unemployment: Over the last years Hungarian government was implementing

a number of measures to promote workforce mobilisation and increase employment. This included

reducing access to early retirement, reforming the social provisioning system in a work-promoting

way, strengthening active labour market instruments, launching a new Public Work Programme

and adopting the new Labour Code. All these measures were complemented by the reform of the

Hungarian tax system with the introduction of a flat-rate personal income tax system and by the

implementation of a new employer benefit system (Job Protection Act), which provides partial or

full tax relief for employers in case of employing low productivity workers (the young, the old,

the low qualified, jobseekers, mothers returning from childcare benefits) workers. As a result of

these measures unemployment level is declining (the unemployment rate of the age group 15-74

has been 7,8% in 2015Q1, compared to 8,3% in 2014Q1 and 11,6% in 2013Q1). Youth

unemployment is also decreasing (the unemployment rate of the age group 15-24 has been 29,8%

in 2013Q1, 21% in 2014Q1 and 19,4% in 2015Q1), however it is still above the adult age

unemployment. The Government considers decreasing youth unemployment as a key priority. In

2015 February, an ESF co-financed large scale active labour market programme was launched

within the Youth Guarantee scheme, and an apprenticeship programme and a youth

entrepreneurship programme also aiming at promoting opportunities for young people are also in

the pipeline.

Key performance indicators for 2020 in accordance with the defined targets are:

Increasing employment rates for those aged 20 to 64 up to 75%;

Increasing the number of those having tertiary education (aged 30-34) or those having

equivalent professional qualification to 30.3% and decreasing the rate of early school

leaving (in the age group 18-24) to 10%.

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Key directions for the development of IIB activities in Hungary

Taking into account the current state of the development of Hungarian economy, short- and

medium-term priorities set by Hungarian government; as well as the IIB’s mission and financial

capacity, the Bank aims at creating a fundamental basis for a long-term and mutually beneficial

cooperation, increasing its commercial reputation and awareness amongst Hungarian business

community as a stable and sustainable partner.

In order to promote a sustainable social and economic development, encourage the growth of

Hungarian economy and support trade and economic cooperation between the IIB’s member states

(Appendix 2), the Bank, while operating in Hungarian territory, intends to focus on working in

partnerships with leading national and international financial institutions towards realisation of

joint projects. The IIB will search for such partners strictly under the provisions of its internal risk

procedures7.

While implementing the Country Strategy the Bank will take into account main directions for

economic policy set by the Hungarian government. Close attention will be paid to providing

support for key sectors of Hungary’s economy:

1) Financing priority sectors of Hungarian industry such as processing industry including

car manufacturing, machine and equipment manufacturing, food processing,

petrochemicals and agriculture, etc.;

2) Supporting financial sector, including that to provide resources for further investments

in SME sector which is facing a growing demand for the access to long-term finance;

development of external trade operations between Hungarian businesses and

businesses in other member states of the IIB;

3) Supporting short-term export and import operations and trade finance by providing

short-term loans to financial institutions to finance for foreign trade contracts of

Hungarian exporters and importers as well as issuing the IIB’s irrevocable

commitments (guarantees, counter-guarantees, standby letters of credit,

reimbursement undertakings);

4) Supporting exports from Hungary by taking the risks of the IIB member states’

financial institutions as well as those in the third countries – non-members of the IIB

– in regard to trade finance products for the term of up to two years.

The Bank has set the following key strategic goals for its activities in Hungary:

Creating a loan portfolio and building up a quality client base;

Active promotion and expanding partnerships with representatives of Hungarian

business community;

Assessing possibilities to participate in joint SME supporting funds with leading

multilateral financial institutions (MFI);

Investing available funds in securities of Hungarian companies and financial

organisations;

7 At the 102nd Meeting of IIB Council in November 2014 it adopted a strategic resolution that the IIB can take the

risks of third countries’ financial institutions to support export operations from the IIB’s member states including

Hungary for the term of up to two years.

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Obtaining finance on favourable terms from governmental bodies, institutions for

development and other Hungarian financial bodies including those publicly owned with

the aim of further reinvesting in the country’s economy;

Establishing business relations with leading national and international financial

institutions in Hungary;

Supporting external trade operations.

To efficiently meet the set targets and goals the Bank will utilise the following set of tools and

services:

Long-term finance of projects with joint investments from the IIB’s member states;

Long-term finance for infrastructure projects;

Short-term finance for financial institutions to finance external trade contracts of

Hungarian exporters;

Participation in syndicated lending for investment projects (the IIB can act as a deal

organiser or its participant);

Performing trade finance operations (providing bank guarantees, counter-guarantees,

standby letters of credit, reimbursement undertakings);

Financing Hungarian banks for further SME lending;

Investing in companies’ equities;

Participation in investment funds;

Treasury operations;

Consulting services.

The Bank’s goals and objectives for the period of this Country Strategy implementation.

1. Creating a loan portfolio and building up a quality client base including:

Creating the loan portfolio, in accordance with the IIB’s mission and strategic goals,

that would allow a balanced funds’ allocation into three main directions:

1. long and short-term lending to publicly owned financial organisations;

2. long and short-term lending to commercial banks and financial

organisations;

3. long and short-term lending to non-financial organisations both

independently and in concert with MFIs and commercial banks;

Expansion of lending to the projects that are of mutual interest for at least two member

states of the Bank;

Hungary’s inclusion to the Bank’s Programme of SME Support for 2014-2017;

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Collaboration with Hungarian Eximbank aimed at expanding trade and economic

cooperation between Hungary and other member states of the IIB8.

A priority in the selection process will be given to9:

Long and short-term finance for export and import operations. Their growth positively

affects GDP growth and increases trade surplus contributing to the reduction of

sovereign debt.

Financing SMEs as the main driving force behind the economic growth; a source of

innovations and the increase in labour productivity within the country.

The above activities will contribute to the development of Hungarian economy, reduction of the

country’s unemployment rate and new jobs creation as well new technologies’ transfer including

the utilisation of renewable and alternative energy resources.

2. Active promotion and expanding partnerships with representatives of Hungarian business

community:

Accelerating efforts to develop partnerships with leading national and international

financial institutions;

Expanding the cooperation with dedicated governmental bodies of the member

countries on a more regular basis;

Expanding contacts with non-governmental and public organisation, including

entrepreneurial associations, science and education centres, charities, etc.

Positioning the IIB as a multilateral supranational institution for development both in

Hungary and internationally through the representatives of Hungarian Delegation to the

Bank’s Council.

3. Assessing possibilities to participate together with leading MFI in joint funds supporting

Hungarian SME.

4. Investing available funds in securities of Hungarian companies and financial organisations;

5. Establishing business relations with leading national and international financial institutions in

Hungary;

6. Supporting trade finance products.

8 In November 2014, Eximbank Hungary and Hungarian Export Credit Insurance Pte, Ltd joined the Memorandum

on Cooperation signed in April 2014 between the IIB and export and credit agencies of the Bank’s member states

(EXIAR, EXIMBANKA SR, EGAP, BAEZ, Exim Bank Romania). Under this document, the IIB provides finance

and the members of the ECA pool provide insurance coverage for the projects realised in the Bank’s member states. 9 A possibility for the Bank to participate in a particular project will depend upon risks evaluation and preferences will

be given to those deals with reduced or medium risk given the acceptable revenue level.

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Products

Amongst products and services that are supposed to be introduced under this Strategy the most

desirable and competitive are the following:

Loan product Product description Form of issuance

Finance for Hungarian

commercial banks for lending

to SMEs or supporting external

trade

Providing long-term finance for Hungarian

banks, their associated financial companies

under the Programme for SME support and

export and import activities.

loan/credit line

Participation in syndicated

lending to Hungarian banks

under the SME Support

Programme

Participation in syndicated lending to

Hungarian banks organised by international

and national financial institutions under SME

Support Programme

loan/credit line

Project finance Investment project finance in a member state

including those guaranteed by ECA

loan/credit line

Participating in/organising

syndicated lending for

investment projects

Participating in/organising syndicated lending

for investment projects

loan/credit line

Short-term trade finance (up to

2 years)

Issuing long-term bank

guarantees

Consulting services

1. Providing short-term loans to banks for

further lending to importers/exporters

2.Issuing the IIB’s irrevocable undertakings

Providing long-term guarantees under the

MSP finance programme for partner banks

Providing consulting services to Hungarian

enterprises interested in developing their

businesses

loan/credit line

bank guarantee

counter-guarantee

standby letter of credit

irrevocable reimbursement

undertaking

bank guarantee

consulting services

Mechanisms for developing the Bank’s interaction with Hungarian counterparties

In order to reinforce its reputation and expand cooperation with Hungarian counterparties, the IIB

aims at increasing interaction with main economic institutions and organisations formed by

business community, national bank for development and dedicated ministries and agencies as well

as institutions for development and MFI performing their investment activities in Hungary.

Among the IIB’s potential partners and counterparties the following organisation stand out:

Type of institutions Organisation name

National financial institutions with public

ownership

Hungarian Development Bank

Hungarian Export-Import Bank Plc.

Multilateral financial institutions for

development

The World Bank Group

The European Investment Bank Group

The European Bank for Reconstruction and Development

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Commercial banks Allianz Bank

AXA Bank

Bank of China (Hungária)

Banif Plus Bank

BNP Paribas Hungária Bank

Budapest Bank

CIB Bank

Citibank

Commerzbank

Credigen Bank

Deutsche Bank

Erste Bank Hungary

FHB Bank

Hanwha Bank

ING Bank

KDB Bank

Kereskedelmi és Hitelbank

Kinizsi Bank

MagNet Bank

Magyar Cetelem Bank

Takarékszövetkezeti Bank

Magyarországi Volsksbank

Merkantil Váltó és Vagyonbefektető Bank

MKB Bank

Oberbank

Raiffeisen Bank

Sopron Bank Burgenland

UniCredit Bank Hungary

WestLB Hungaria Bank

Transnational corporations Alcoa-Kofem Kft.

Audi Hungaria Motor Kft.

Bridgestone Magyarorszag Kft.

Continental Automotive Hungary Kft.

Coca-Cola HBC Magyarorszag Kft.

Daimler AG

Dalkia Energia Zrt.

Denso Gyarto Magyarorszag Kft.

Ericsson Magyarorszag Kft.

GE Hungary Kft.

Hankook Tire Magyarorszag Kft.

Huawei Technologies Kft.

IBM Magyarorszag Kft.

Jabil Circuit Magyarorszag Kft.

Lego Manufacturing Kft.

Linamar Hungary Zrt.

Magyar Suzuki Zrt.

Microsoft Magyarorszag Kft.

National Instruments Magyarorszag Kft.

Nokia

Siemens Networks Kft./ Siemens Zrt.

Richter Gedeon Nyrt.

Sanofi-Aventis Zrt.

Stadler Rail-Csoport

TATA CS Ltd. Magyarorszagi Fioktelepe

Tesco-Global Aruhazak Zrt.

TEVA Magyarorszag Kft.

14

Waberer’s International Zrt.

Hewlett-Packard Magyarorszag Kft.

Robert Bosch GmbH

Governmental bodies Hungarian Investment Promotion Agency

Other (associations, funds, etc.) Hungarian Chamber of Commerce and Industry

Environmental and social aspects of IIB

In 2014 the Bank joined the United Nations Global Compact – the most prominent initiative in the

field of sustainable development that unite leading international financial institutions (more than

10 thousand from 145 countries around the world) with dominant positions in the field of

promoting both stable and open global economy and sustainable development.

The Bank voluntarily took on responsibilities to observe the 10 basic principles of the UN Global

Compact regarding human rights protection, employment relations, environmental protection and

corruption crackdown.

By joining the UN Global Compact the Bank openly confirms its understanding that best practice

is based on the initiative’s universal principles that promote further sustainability, foster thriving

and prospering societies as well as more accessible and fair global market. The Global Compact

membership will enable the Bank to develop its potential in further mastering the practice of

sustainable development and promoting the principles of corporate responsibility within business

communities.

15

Appendix 1

Hungary’s trade and economic relations with the IIB Member States 10

Hungary – exports of goods (USD million)

0,0

1 000,0

2 000,0

3 000,0

4 000,0

5 000,0

6 000,0

7 000,0

8 000,0

Bulgaria Vietnam Cuba Mongolia Russia Romania Slovakia Czech

Republic

2009 2010 2011 2012 2013

Country Hungary’s share of exports in 2013

Bulgaria 1,0%

Vietnam 0,1%

Cuba 0,0%

Mongolia 0,0%

Russia 3,1%

Romania 5,9%

Czech republic 3,7%

Slovakia 4,8%

Hungary – imports of goods (USD million)

0,0

1 000,0

2 000,0

3 000,0

4 000,0

5 000,0

6 000,0

7 000,0

8 000,0

9 000,0

10 000,0

Bulgaria Vietnam Cuba Mongolia Russia Romania Slovakia Czech

Republic

2009 2010 2011 2012 2013

Country Hungary’s share of imports in 2013

Bulgaria 0,3%

Vietnam 0,1%

Cuba 0,0%

Mongolia 0,0%

Russia 8,6%

Romania 2,8%

Slovakia 5,7%

Czech Republic 4,1%

10 Source: UNCTAD

Appendix 2

SWOT Analysis

Strengths Weaknesses

Political stability – the coalition of the Hungarian

People’s Alliance (FIDESZ) and the Christian

Democratic People’s Party took 133 parliamentary seats

(117/16 respectively) in the elections to Hungary’s

National Assembly held in April 2014. The next

presidential and parliamentary elections are scheduled for

2017 and 2018 respectively.

Hungary still faces lower activity and participation rates

compared to the EU average. Nevertheless, in recent years

a significant improvement took place, supported largely by

active labour market policies of the government.

Geographical position in the Centre of Europe at the

crossroads of the main European transport routes: from

Northern Germany/the North Sea to the Black Sea; from

the ports of the Adriatic Sea to Moscow; the passage from

the Baltic states to Turkey and Greece.

Those employed in Hungarian economy account for 59%

of the country’s total population. The same average for the

countries of central and eastern Europe reaches 63% and in

the OECD member states – 65%.

One of the busiest motor routes in Europe (after Belgium

and the Netherlands). A wide railway network (rail

transport accounts for 20% of all cargo traffic, which is

significantly higher than average in the EU) connects

Hungary with the main ports of Western Europe.

The share of Hungarian ‘shadow economy’ reaches 11%

occupying the fourth highest place amongst the OECD

member states (only Italy, Mexico, Slovakia and Poland are

placed above).

Strong industrial sector, which makes Hungary a

competitive exporter.

Low inflation and, therefore, low credit interest rates.

Investments increased at a record rate by 14% in 2014.

Last year's massive increase in investments was not

simply due to the outstanding performance of a few

sectors, as significant expansion was recorded in 17 out

of the 19 sectors. The contraction on the housing market

lasting since 2009 ended in 2014, as the number of

housing constructions increased by 15% and the number

of building permits issued rose by 28%.

Opportunities Threats

Improvements in budgetary policy should allow for a

more active deployment of the MNB’s monetary policy

and increase the prospective for successful economic

policy.

Hungary’s relatively high public debt ratio remains a

vulnerability. However, its declining path (from 81% of

GDP in 2011 down to 76.9% by the end of 2014) as well as

the reduction of the reliance on non-resident funding (its

share declined from 65% in 2011 to 54% by the end of

2014) is beyond doubt. Most FX residential loans have

been exchanged to Forints late 2014 which eliminated a

serious financial risk according to the latest OECD

Economic Outlook. The Government has also decreased

the share of FX debt within gross government debt. Hungary occupies the second (after Estonia) place in the

ease of doing business ranking among the countries of

East and South-East Europe and Central Asia11.

According to the evaluation of the Wold Bank Group

(Doing Business Ranking 2015) Hungary occupies 54th

place out of 189 countries in the field of regulatory

economics.

Tax increase, among others, for businesses with foreign

ownership, in order to support government balance

revenues might lead to a sharp fall in equity investments or

foreign investments outflow.

Hungary has a relatively low salary levels compared to

those in central European countries, and a relatively well-

educated and high-skilled workforce.

Climbing labour costs might lead to foreign investors’

outflow.

11 Based on ВМI Business Environment Ranking.

Appendix 3

Hungary’s macroeconomic indicators and their projected value12

Indicator 2013 2014 2015 2016 2017

GDP (USD billion) 133,4 137,2 121,8 127,4 134,8

GDP growth (%) 1,5 3,6 3,1 2,5 3,1

GDP per capita (USD) 13 486 13 887 12 350 12 937 13 713

Unemployment rate (%) 10,2 7,7 6,9 6,1 5,8

Consumer Price Index (%) 1,7 -0,2 0,0 1,6 2,5

Net Foreign Direct Investments

(USD billion) 1,2 0,6 - - -

MNB interest rate (%) 3,00 2,10 2,80 4,00 4,50

Exchange rate HUF/USD 223,7 232,5 276,3 276,3 276,3

Exchange rate HUF/EUR 296,9 308,7 304,7 303,7 303,7

Budget deficit /surplus

(USD billion) -3.3 -3,5 -2,9 -2,5 -2.3

Budged deficit/surplus

(% of GDP) -2,5 -2,6 -2,4 -2,0 -1,7

Exports of goods and services

(USD billion) 118,6 124,5 112,1 120,8 130,8

Imports of goods and services

(USD billion) 108,7 114,3 102,0 109,0 118,0

Trade balance (% of GDP) 7,5 7,5 8,3 9,3 9,5

Current account balance

(USD billion) 5,4 5,7 6,5 7,5 8,4

Current account balance (% of GDP) 4,0 4,1 5,4 5,9 6,2

Gold and foreign exchange reserves

(USD billion) 44,9 46,2 42,5 39,6 39,7

12 Source: Source: Fact data of the Hungarian Central Statistical Office and the National Bank of Hungary and

forecasts of the Ministry for National Economy of Hungary