NEW ECONOMIC REALITY FOR HUNGARY'S NORTHWEST

C O N F I D E N T I A L SECTION 01 OF 03 BUDAPEST 000871

SIPDIS

DEPARTMENT FOR EUR/CE JMOORE, EB/OMA, INR/EC;, TREASURY FOR
ERIC MEYER, JEFF BAKER, LARRY NORTON; COMMERCE FOR SSAVICH

E.O. 12958: DECL: 11/30/2019
TAGS: ECON EFIN ETRD PREL HU
SUBJECT: NEW ECONOMIC REALITY FOR HUNGARY'S NORTHWEST

Classified By: ECONOMIC OFFICER STEVE WESTON FOR REASONS 1.4(b) and (d)


1. (C) Summary. Eighteen months ago, Hungary's north and
northwest regions enjoyed the lowest unemployment rates and
among the highest average incomes in the country. Host to a
number of large export-oriented international automotive and
technology companies and their suppliers, today the region is
coping with the lingering effects of recession, volatile
exchange rates, a lack of credit hurting small and
medium-sized enterprises, and the unanticipated effects of
neighboring Slovakia's entry into the eurozone. The
recession has also strained relations between major
manufacturers forced to downsize and host towns hoping to
preserve jobs. Echoing a country-wide trend, the impact of
the economic crisis is heightening levels of dissatisfaction
with the political status quo, and support for the opposition
Fidesz Party is strong. Expectations are high that the next
government will be more responsive to the needs of smaller
domestic businesses, and will enhance Hungary's
competitiveness in the region to attract foreign investment.
End Summary.

HUNGARY'S NORTH AND NORTHWEST BORDER REGION


2. (U) Hungary's northwest border region has been ONE of the
primary sources of Hungary's export-led growth in recent
years, and the region has enjoyed the lowest unemployment
rates and some of the highest income levels in the country.
Multinational manufacturers and their suppliers make up an
important segment of the economies of medium-sized northern
towns such as Gyor, Esztergom, Komarom, and Tatabanya. Audi,
Suzuki, GE, and Nokia are among the region's largest
employers, and their competitive, export-oriented production
facilities that support scores of local suppliers have
contributed significantly to the region's low employment
rate, and to Hungary's export-led growth. The region also
has a vibrant agricultural sector, and is host to Hungary's
largest milling company.

ECONOMIC CRISIS HITS THE NORTHWEST


3. (C) The recession in Germany and other key European
markets weakened demand for Hungarian exports, and the
government's fiscal consolidation program and austerity
measures have suppressed domestic demand. As a result,
Hungary is projecting a recession of 6.7 percent for 2009,
and unemployment in October reached 10.5 percent, the highest
rate since 1996. As orders dry up, manufacturers are forced
to reduce output and lay off workers. Managing Director of
Suzuki Hungary Hisashi Takeuchi notes that Suzuki's
production in Hungary is down by over one-third, and about 15
percent of its Hungarian suppliers are facing bankruptcy or
ownership changes this year. Karoly Kovacs, Managing
Director of the Komarom Industrial Park, home to a large
Nokia plant and a number of Nokia suppliers, notes that a
number of small Nokia suppliers are winding up their
businesses because they cannot survive on the greatly reduced
number of orders. Weak domestic demand has caused new auto
registrations to plummet 70 percent year on year, according
to October statistics. As a result, Suzuki closed a third of
its auto dealerships, from a previous high of 150 in 2008 to
just over 100 today.


4. (U) Because of the region's previously low rate of
unemployment, northwest Hungary faces the largest increase in
unemployment in the country. In addition to manufacturing,
Joseph Juhasz, President of the Komarom-Esztergom County
Chamber of Commerce notes that the construction industry in
the region has been particularly hard hit.

SLOVAK CONTRACT WORKERS OFTEN THE FIRST TO GO


5. (C) Manufacturers near the border with Slovakia have long
relied on thousands of temporary or contract workers from
predominantly Hungarian-speaking southern Slovakia. Unlike
"permanent" employees, these contract workers can be
terminated easily and at a lower cost to employers. When
orders began falling this year, these workers were often the
first to be let go. A lawyer with knowledge of the Komarom
industrial park estimated that some 70 percent of the nearly
5,000 Slovak workers hired through intermediary employment
agencies lost their jobs at Nokia or Nokia suppliers in
northern Hungary.

IMPACT OF CURRENCY VOLATILITY, SLOVAKIA'S EUROZONE MEMBERSHIP


6. (U) The volatile Hungarian currency, coupled with
Slovakia's eurozone membership in January 2009 has also had a

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significant impact on the region. As the Hungarian forint
weakened substantially against the euro early this year,
Hungarian retailers experienced a significant increase in
Slovak citizens crossing the border to shop in Hungary.


7. (C) Northern Hungary's "mini-retail boom" has not been
beneficial for Hungarian agricultural producers, however.
Hungarian farmers complain that farmers in southern Slovakia,
unable to sell their goods domestically when much cheaper
products are available to Slovak consumers willing to travel
into Hungary, began dumping dairy and other agricultural
products in the Hungarian market at prices below market
value. Hungarian farmers note that during this period,
Slovakian farmers were willing to sell at a considerable loss
in Hungary because otherwise their goods would go unsold.
Hungarian farmers also accuse large retailers like Auchan and
Tesco of taking advantage of this opportunity to cut them out
by purchasing directly from farmers in Slovakia.


8. (U) Larger manufacturers who export most of their products
to the eurozone have not felt a considerable impact from
exchange rate volatility. Suzuki officials, for example,
note that 90 percent of the company's sales and purchases are
euro-based, so they are largely insulated from exchange rate
shocks.

LACK OF CREDIT HURTS SMALL BUSINESSES


9. (U) Hungarian Chamber of Commerce officials note that the
lack of credit available to small businesses remains a
problem throughout the country, and northern Hungary is no
exception, as banks reduce credit extended to small
businesses because of their greater perceived levels of risk.
Chamber of Commerce officials note that a key program that
has allowed many small businesses to survive the recession is
the "Szechenyi Card". Launched by the former Fidesz
government and expanded under the Socialists, the program
provides small businesses with a government guaranteed line
of credit of up to 100,000 euros. Over 85,000 Szechenyi
Cards are in use today.

RELATIONS WITH LOCAL GOVERNMENTS


10. (C) The economic situation has strained relations between
major manufacturers forced to downsize and host towns hoping
to preserve jobs. Some local officials complain that large
companies are not doing enough to preserve jobs, and that
foreign-based headquarters make decisions on production line
and plant closures without considering the impact on the
local economy. They further complain that large
manufacturers increasingly abandon local suppliers in favor
of cheaper overseas suppliers - often from China. Komarom
Industrial Park Director Kovacs admitted his town made a
mistake to "rest the entire industrial park on a single
pillar - Nokia," and said that the local government is trying
to market the park to other industries as well. On the other
hand, companies like Suzuki note that although local and
national governments actively support new potential
investors, they do relatively little to support existing
investment.

THE NORTHWEST MOVES RIGHT


11. (C) Meetings with businesses, farmers and other citizens
in northwest Hungary echo trends we are seeing throughout the
country - that the governing Socialist Party is seen as the
primary cause of the nation's economic woes, and as a result,
the electorate is moving increasingly to the right.
Officials note that there has been an increase in rallies
this year in Esztergom and other northern towns by far-right
groups like Jobbik. Although the far right seems to be
making the greatest gains among those most negatively
impacted by the current economic situation, the business
community appears to favor the center-right Fidesz Party,
which it sees as a champion of Hungarian small business
interests, and which they hope will help improve Hungary's
international competitiveness.

CROSS-BORDER COOPERATION


12. (C) A common theme in meetings with economic actors in
the region is the good relations between the predominantly
Hungarian speaking communities on both sides of the border.
Joint cultural, educational and business events occur
regularly. For example, there are a number of student
exchange programs, and the Esztergom-Komarom County Chamber
of Commerce noted that they are working on a joint EU tender
with their counterparts in Slovakia. Many in the region view

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recent tensions between the two capitals as merely an attempt
by political interests on both sides to divert attention away
from domestic political issues.

COMMENT: THE END OF THE COMPANY TOWN AND HIGH EXPECTATIONS
FOR FIDESZ


13. (C) Many small businesses and suppliers to major
manufacturers are trying to hold on until export markets in
Western Europe rebound and orders pick up again. In the
longer term, cities and towns plan to increase efforts to
attract a more diverse group of companies so their economic
health is not linked to the success of a single industry.
With the Socialist Party receiving most of the blame for the
current economic situation, northern Hungary is expected to
join much of the rest of the country in supporting Fidesz in
national elections next year. Expectations for the new
government will be high, however, particularly among smaller
businesses, who will be looking to Fidesz to match their
rhetoric with results.

14 (U) This message has been cleared by Embassy Bratislava.
LEVINE