Yesterday an article appeared in Bloomberg entitled “Hungary Bolsters Utilities to Expand.” The story reported that the Hungarian government wants to expand MVM (Magyar Villamos Művek) Zrt., a state-owned electricity wholesaler, to increase Hungary’s influence in the Central European energy markets. Surprisingly this was announced by János Lázár, the leader of the Fidesz parliamentary caucus, to two Bloomberg reporters in Budapest: Zoltán Simon and András Gergely.
Lázár explained to them that now that the government has become MOL’s largest shareholder with a 25% stake it is time to expand further in this strategically important energy sector. MOL, Lázár said, already controls refineries in Croatia, Italy, and Slovakia and now the state-owned MVM can serve as a vehicle for further expansion. Lázár was quite clear: “We want to establish a competitive state player in the energy sector,” and he added that he sees “great potential in MVM … [because] there’s a lot of money to be made here, a lot of money.”
As it stands now, MVM doesn’t control the whole Hungarian market and the Fidesz government figures that MVM must expand. Lázár didn’t explain how this expansion will be achieved; he told the reporters merely that “the opportunities determine whether we reach these strong positions through acquisitions or through agreements, but certainly we have to act as market players.” However, Világgazdaság, a paper dealing mostly with economics and finance, seemed to have learned already in late June that Hungary had offered 800 million euros ($1.1 billion) for the German-owned E.ON AG’s Hungarian gas unit. Apparently, the offer hasn’t been accepted “for now” because Germany’s biggest utility company demanded 1.2 billion euros for its Hungarian domestic gas unit. E.ON, by the way, has a major presence in Hungary: it owns three of the country’s six electricity companies, two gas suppliers, and underground storage.
If Világgazdaság‘s information is correct, the Hungarian government–after spending 1.8 billion euros to acquire a sizable stake in MOL–is now planning to spend nearly another billion euros buying E.ON’s gas unit. Raffaella Tenconi, a London-based economist at Bank of America Merrill Lynch, said that “Hungary’s drive to snap up stakes in strategic industries may undermine its ability to cut public debt.”
As things stand now, economists have made some dire predictions recently about Hungary’s ability to stick to the original figures it presented in its convergence program. Economic minister György Matolcsy predicted a 3.5 percent growth for 2011 and that was his more conservative estimate, but it looks as if Hungary will be happy to achieve a 2.5% growth. Meanwhile internal consumption is still dropping and so are tax revenues. Although the Hungarian government predicted a 2.8% deficit for the current year, most analysts are convinced that the deficit will be over 3%. According to some calculations by former members of the Budgetary Council that was dispersed by the Orbán government, there is a real likelihood that next year further austerity measures will have to be introduced. Under these circumstances it seems foolhardy to purchase companies for billions of euros.
The Orbán government would appear to be gambling on some spectacular economic growth in the near future which would allow it to reduce sovereign debt as well as expand its “business activities.” As for the rapid reduction of the sovereign debt, Raffaela Tenconi expressed her doubts because “evidence is accumulating suggesting that the public debt reduction plan will prove much less than forecast, leaving Hungary more exposed to external vulnerability.”
The government is sinking billions into expanding the state’s business ventures. It seems to me that they would like to have the bulk of the energy sector in the hands of the Hungarian state where, they hope, “a lot of money [can] be made.” Of course, a lot of money can be lost as well, as the fall in MOL stock demonstrates. MOL shares have lost approximately 15% of their value since the Hungarian state decided to be one of the company’s principal owners. The loss occurred in two stages: right after the Hungarian state made its purchase and a month or so later when rumors surfaced that the CEO of MOL, Zsolt Hernádi, paid a bribe of 10 million euros to Ivo Sanader, Croatian prime minister at the time, in order to secure a controlling share in the Croatian oil company INA.
The Croatian prosecutor’s office asked the Hungarian authorities to provide legal assistance (jogsegély) in investigating Hernádi’s case. The Hungarian Chief Prosecutor’s Office denied legal assistance but considered the request as a complaint that ought to be investigated.
Meanwhile the Hungarian state as a part owner of MOL immediately announced its position on the Croatian-MOL controversy. When the Croatian government announced its intention to review the 2003 and 2009 agreements signed by MOL and the former government in Zagreb, Orbán announced that “it’s our firm stance as an owner of MOL that we won’t agree to any changes in the contract between the Hungarian and the Croatian oil companies.” At the same time, the Hungarian prime minister made it clear that the Hungarian government will not stand by Zsolt Hernádi if the charges against him prove to be well founded. “We’re aware of the charges [but] we don’t regard them as a matter [concerning] the government. It’s the task of law enforcement agencies to clarify the charges, we do not wish to get involved.” So, Hernádi is on his own and according to some people in the know Orbán wouldn’t be too unhappy to see him go. In such a case, the speculation goes, Orbán could more easily pass the government’s MOL shares on to MVM, a company completely owned by the state. What would happen to MOL’s shares after such blatant state interference no one knows with certainty, but the market normally doesn’t take kindly to such moves.