There is a widespread “national” cheer-up all over the Hungarian media (with few exceptions) due to the fact that the Hungarian state announed to buy 21.2% stake in Hungarian publicly traded oil company, MOL. The news are presented as it is another victory on behalf of the country and can stabilise the energy dependency of the country. The deal worth 1.88 billion EUR (510 billion HUF) is funded from the so far unused foreign currency-denominated IMF loan facility that was provided to Hungary in 2008, at the very height of the financial crisis. (remember: no, Hungary did not become the next Iceland, thanks to the EU/IMF-fabricated emergency loan facility)
However there are plenty of concerns regarding the deal itself and the timing of the transaction, as well as the necessity and economics of this partial re-nationalisation. Quick assessment from me: (comments are more than welcome!)
On the positive side:
– “good feeling” that the HUN state now has a controlling decisive power in the country. (advantages are more of political and nationalistic nature, not so tangible)
– energy-dependency of Hungary reduced: doubtful, slightly positive. Our huge dependency on external energy sources is not because MOL was in foreign hands, but because of lack of our own resources. Yes, MOL is making promising research in various countries, this could help though. This is why I marked it as slightly positive.
– good investment in a good company: positive. The MOL company is indeed performing well both domestically and internationally. The company has delivered 103 billion HUF consolidated profit in 2010. The future prospects of its shares prices is upward leaning, yes, buying the shares of the company can be considered as a good investment. Also the dividends payable by MOL in the future are considerably high – as it seems now. BUT please consider the fact that MOL has not paid dividend neither for 2010, nor for the previous two years….
– share price implications: slightly positive, at least analyst say the announcement will have no or little effect on the price of the MOL shares, they look more bullish at future increase. Let’s assume they are right.:):)
– positive impact on Hungarian economy: doubtful. I personally do not see what additional positive implications the change of 21% stake in the company will have. It may have so, who knows what the government plans to do with the company….
-stability of MOL: doubtful, slightly positive. Some claim that increased state ownership will stabilise MOL’s position and strenghten management, and reinforce strategy. Clearly it is stabilising the right-leaning MOL management’s position and offers good opportunities for Fidesz-nominated candidates for leadership positions, supervisory board, audit committee etc. (No doubt this was always the case whatever colour the existing government represented) I tend to agree to some extent that the Mol and Surgut relationship was never a good marriage, so it will eliminate some risks arising from the owners. On the other hand, it never had practical implications on the day-to-day managment.
On the negative side:
– timing of the transaction: the Hungarian government is in the middle of incurring severe austerity measures on various strata of society – although these are not allowed to be called as “austerity measures” within the rows of the governing coaliton for political communication purposes:):) – , it engages in various cost saving initiatives, as well as reforming the pension system and healthcare system, is about to re-shape educational system, and at the same time it committed to keep the 3% budget deficit – rightly so, and important to mention: seems to fail to encourage internal economic demand to pick up. So is the right time to invest 1.88 bn EUR of loan into share purchases? I do not think so.
– economics of the transaction: Hungary is buying now the 21.2% share at a price of 22,400 HUF. Mr Viktor Zsiday has wrote a good analysis in his blog (see here – in Hungarian only: http://www.zsiday.hu/blog/top) The bottom line is that the MOL shares are re-purchased now at the midst of a commodity price boom. Previous owners, OMV and Surgutneft are making a profit on the buy and sell price difference of their Mol packet, respectively (Surgut is reported to sell at 34% premium compared to their buy price). Is it economic to buy now? Please decide yourself.
(let’s not forget history here for a minute: in 2000 the Fidesz government had frozen gas prices for social prices – “stopping gas prices at the border”:):) – and as a consequence, it had pushed down MOL share to the low end, that was the time for OMV to buy shares of the Hungarian oil company at a bargain price, good deal for them)
– profitability of the transactions: will the 510 billion HUF investment ever pay back only owning to the change of ownership of 21 stake%? I have not heard arguments to back this up. If you know of any, please post a comment, I am very open to hear good arguments.
– source of funding: this transaction is funded from the EU/IMF-loan, to be more precise: the unused loan facility of the IMF credit line that was placed into the National Bank reserves. It raises two major concerns: a.) can the National Bank buy shares of a publicly traded company? An expert says it is not possible, see his opinion here (in Hungarian unfortunately): http://www.klubradio.hu/cikk.php?id=16&cid=127730, b.) economic minister claims this loan facility usage is not contributing to the national debt. I struggle to understand how it is possible to use a loan and not count it as debt… Probably the only explanation is the case that it has already been counted as part of the existing public debt. Is it the right way of funding? The government and the Bankers’ Association is just about to strike a deal to help troubled mortgages debtors who are suffering from increased loan repayment due to changes of foreign exchange rates…. is it the right way to fund such a deal from a foreign currency loan? is this sending the right message to the people?
– state ownership: I also noted this on the negative side, simply because I feel that state-owned companies have very poor track record in Hungary in the past 20 years, with very few exceptions. There are more apparent cases that government-appointed managers are not the best caretakers in profit-driven organisations. True though, MOL is refreshing exception. But overall I do not see this as an upside, let’s agree on a “neutral” count. (and MOL is still only partly state owned)
Conclusion: I do not fully understand the positive hype of this announcement today, and if I think through the above-mentioned implications (timing, funding, risks), I feel there is more political message in this announcement than real economic benefit to the Hungarian people.
I really hope I will prove wrong. That would be better for Hungary.
(side note: imagine the same situation that Mr David Cameron and his economic minister stand up and announce today that the UK government has purchased a 21% stake in the BP company from an IMF-provided EUR loan. Now please think through the implications.)
László Ráb
25 May 2011
Ma két nagyon érdekes és szerintem hasznos olvasmányt szeretnék ajánlani. Mindkettő a múlt heti Magyar Narancsban jelent meg. Az első egy interjú Felcsuti Péter közgazdásszal, nem mellesleg a Raiffeisen Bank volt vezérigazgatójával. A devizahitelek kiváltásáról és egyéb alternatívákról beszél. Nagyon érdekes és tanulságos, kevésbé politikai, inkább közgazdasági megközelítésből.
Ráb László
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