capital markets was reduced, and Hungary drew on reserves to meet net repayments of about US$1 billion to private creditors. A relatively strong current account performance in 1991 has limited Hungary's financing needs to amortization payments and reserve accumulation. Ineaddition, DI flowsincreased strongly toaalmostUS$400 million for January through May 1991.

# Factors Influencing Foreign Involvement in the Economy. _Size of Private Sector_

On the output side, recorded industrial production of enthe wit more ded industriacpountin or enterprises with more thean 50 employees, accounting for 80 percent of output, fell 9 percent in 1990. In 1991, output of enterprises employing more than 300 people decreased by 20%. At the same time, an expansion of over 50% occurred in theoutputofprimarily private small businesses employing less than 50 persons. Large enterprises, in particular, showed less flexibility in shifting production into exports to western markets. Production of small enterprises is reported to have officially doubled, reducing the fall in total production somewhaL In the first eleven months of 1991, Hungary's external financing situation strengthened through better than expected current account performance, higher foreign direct investment inflows and large inflows from official credltors. As a result, access to international capital markets increased. Foreign direct investment amounted to US$750 million by the end of September 1991 compared to US$337 million for the whole of 1990.

# _Reorientation_ **_of_** _Trade_

No major new medium-term bank credits were announced in 1991, as banks continued to receive net payments, implying a reduction in their exposure. A US$ 100 million bond issue was placed in the European market by Bankers Trust in July 1991, carrying a coupon rate of 300 basis points over LIBOR. Bond issues announced in the sterling market were postponed, however, as the political situation in neighboring Yugoslavia contributed to uncertainty in the market. There were also three DM bonds in March, April and October 1991. The first two were issued each with a five year maturity, in the amounts of DM 200 million and DM 150 million. The October 1991 DM bond maturesinseven years. HungaryalsotappedtheEuromarket in October 1991 with an issue of ECU 200 million and a Yen issue of 20 billion. The ECU issue matures in five years, and the Samurai in seven years. Two more bonds have been issued subsequently in 1992: a Samurai bond of 30 bilion yen and a DM600 million bond. (See Annex 1 for a summary of Hungary's access to bond markets).

Exports to the CMEA region amounted to US$630 million plus TR500m which is substantially less than the TR2.6 billion registered in the first half of 1990. The reorientation of Hungarian foreign trade continues: in the first six months of 1991 about 73% of exports were destined for the OECD region, of which 47% were for the EC. Exports to Germany increased by 58%, and imports from there by 71%. (Only some 10% of trade with Germany corresponds to former GDR territory). The volume of trade with Germany may reach some US$4 billion by end 1991.

In convertible currency trade with the Soviet Union, Hungarian deliveries amounted to US$400 million, and imports to US$675 million in the first eight months of 1991.

Despite real appreciation of the forint, exports to Western markets increased strongly. In November 1991 the Government devalued the forint by about _5%_ in order to strengthen competitiveness.

Table7showsthat1989wasthelastyeainwhichcommercial The situation is unbalanced with regard to trade-related banksmadeapositivenettransfertoHungary.Nonewshrntefn payments; while Hungary reportedly transfers the paycaedits have been reclrded either. On the other hand, positive ments for imported goods without delay, the USSR had inflows are still coming fromn oter pivate ceitors. opened letters of credit amounting to only US$163 million The situation is unbalanced with regard to trade-related ments for imported goods without delay, the USSR had opened letters of credit amounting to only US$163 million by the end of July. In effect, therefore, Hungary is extend_Table_ 7: Hungary: External Financing Flows **(in** US$ million)

||1989|1990|1991|1992|
|---|---|---|---|---|
|External Borrowing, Net<br>of which|1,268|-646|1,340|350|
|Commercial Banks|529|-1,670|-750|-935|
|Disbursements|1,866|1,015|700|550|
|Repayments|-1,280|-1,485|-1,450|-1,665|
|ST credits, net|-56|-1,200|0|180|
|Other Private Creditors, Net|818|677|550|443|
|Disbrrsements|1,000|382|750|600|
|Repayments|-224|-260|-310|-358|
|ST Credits, Net|42|555|110|200|

Source: IIF,Country Report dated November 8, 1991 15