VZCZCXRO4327
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSL RUEHSR RUEHVK
RUEHYG
DE RUEHUP #0564/01 2161501
ZNR UUUUU ZZH
R 041501Z AUG 09
FM AMEMBASSY BUDAPEST
TO RUEHC/SECSTATE WASHDC 4375
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 BUDAPEST 000564 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EUR/CE, INR/EC, TREASURY FOR ERIC MEYER, 
JEFF BAKER, LARRY NORTON 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EU HU
SUBJECT: FUND INDUSTRY SURVIVING ECONOMIC CRISIS, BUT MAY 
FACE DEATH BY EURO 
 
REF: BUDAPEST 477 
 
¶1. (SBU) Summary.  2008 was the worst year on record for the 
Hungarian investment fund industry, with capital flight and 
declining yields resulting in a decrease in total assets of 
Hungarian funds of over 20 percent.  Real estate and money 
market funds were particularly hard hit.  A run on Hungarian 
real estate funds beginning in October 2008 resulted in the 
Hungarian Financial Supervisory Authority suspending real 
estate fund redemptions for 10 days, and subsequently 
requiring several funds to restructure into close-ended 
funds.  Although capital flight has slowed and the industry 
is fairly optimistic about attracting new capital, Hungarian 
funds continue to compete with banks offering high short-term 
interest rates.  A major concern for the fund industry is 
Hungary's adoption of the Euro and the continued integration 
of the European fund market.  Domestic fund companies fear 
that once Hungary adopts the Euro, there will be little to 
differentiate them from larger European fund companies, and 
local providers will devolve into sales offices for 
pan-European funds.  Seeing the writing on the wall, fund 
industry executives hope that Budapest can become a "regional 
hub" for fund activity, and are urging the government to be 
forward looking in developing a new Investment Fund Act that 
could help attract regional fund management or back-office 
operations.  End summary. 
 
2008: WORST YEAR ON RECORD 
 
¶2. (U) 2008 was the worst year on record for the Hungarian 
investment fund industry, resulting in a one-year decrease in 
total assets of Hungarian funds of over 20 percent 
(approximately HUF 563 billion, or USD 3 billion), with real 
estate and money market funds particularly hard hit.  All 
categories of open-ended publicly offered funds investing in 
securities suffered huge redemptions, resulting in a decline 
of assets for all fund categories except for guaranteed 
funds. 
 
¶3. (U) Although negative fund performance and increased 
volatility caused investors to begin withdrawing from 
investment funds early in 2008, an unprecedented wave of 
withdrawals came in late October after the GOH introduced 
guarantees for bank deposits, and the National Bank's 300 
basis point increase in the base rate caused bank deposit 
rates to shoot up.  Real estate funds were particularly hard 
hit by the wave of redemptions, and despite the funds' large 
liquidity cushions, in November 2008, the Financial 
Supervisory Authority (HFSA) was forced to step in and 
suspend redemptions of real estate funds for 10 days and to 
lengthen the redemption period for funds from around 3 days 
to up to 90 days (reftel). 
 
OUT OF THE FRYING PAN... 
 
¶4. (U) In recent months, rising yields and improved market 
sentiment have slowed the pace of withdrawals from domestic 
funds.  In June, an estimated HUF 20 billion (approximately 
USD 100 million) was withdrawn, bringing the total 
redemptions for the first half of 2009 to HUF 158 billion 
(approximately USD 800 million).  Despite the continued high 
level of redemptions, Andras Temmel, Secretary General of the 
Association of Hungarian Investment Fund and Asset Management 
Companies (BAMOSZ) believes that "the worst is over" and that 
as the economic climate in Hungary continues to improve, 
investors will begin to return.  He also notes that declining 
interest rates for bank deposits will continue to make 
investment funds more attractive for retail investors.  He 
predicts the funds likely to recover most quickly include 
commodity-based, derivative, and institutional funds. 
Despite heavy losses to the Hungarian fund market, Temmel 
points out that Hungarian fund industry losses (including 
withdrawals and declining asset values) have been lower than 
the average fund market in the EU. 
 
...AND INTO THE FIRE 
 
¶5. (SBU) BAMOSZ is not particularly optimistic about the 
future of the Hungarian domestic fund market, however. 
BAMOSZ Analyst Miklos Farkas notes that the domestic fund 
industry survives today by being able to offer HUF 
denominated funds to the generally risk-averse Hungarian 
retail investor.  (Biographical Note: Miklos Farkas is the 
son of Istvan Farkas, the recently resigned president of the 
Hungarian Financial Supervisory Authority - see reftel.  End 
biographical note).  Once Hungary adopts the Euro, and once 
 
BUDAPEST 00000564  002 OF 002 
 
 
the EU investment fund market is more integrated, Farkas 
believes that there will be little left to differentiate 
Hungarian investment fund companies from larger European 
funds.  As a result, pan-European funds may come to dominate 
the Hungarian market, leaving behind only a domestic sales 
office. 
 
¶6. (SBU) Temmel believes that one way the Hungarian fund 
industry could survive these impending changes is for Hungary 
to become a "Central and Eastern European regional hub" for 
fund activity, possibly including fund management or 
back-office operations.  To do so, however, BAMOSZ believes 
Hungary would need to further develop its legislation to make 
it an attractive location for investment fund and asset 
management companies.  For example, according to BAMOSZ, 
Hungarian legislation should include provisions for fund 
types not currently available in Hungary, like umbrella 
funds, and should change fund distribution rules for fund 
companies to create a more flexible legal and regulatory 
environment.  BAMOSZ has provided input to the Ministry of 
Finance on developing a new Investment Fund Act, and believes 
the current government and the Ministry of Finance understand 
the issues and support the domestic industry. 
 
COMMENT 
 
¶7. (SBU) Other than a favorable legal environment, it is 
unclear what Hungary's relatively small market (comprised of 
about 400 funds managing approximately USD 13 billion) has to 
offer as a regional hub for investment fund companies.  With 
the Finance Ministry preoccupied with crisis management and 
preparation of the 2010 budget, it is unlikely that a new 
Investment Fund Act will be enacted in the near term. 
Although BAMOSZ may have grounds for concern about the impact 
of eurozone membership on the Hungarian fund industry, the 
several years (or more) until Hungary meets the conditions 
necessary to adopt the Euro may give the industry time to 
adjust its business model.  End comment. 
LEVINE