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Hungary Financial Instruments
Before reforms were enacted in 1983, enterprises had no
options other than depositing their after-tax profits in
bank
accounts or investing them in their own operations, and
individuals had no options other than maintaining savings
accounts or investing in housing or real estate. In 1989
enterprises could deposit funds at a number of banks;
invest in
their own plants; lend money to other enterprises through
inter-enterprise loans; and buy, issue, and trade stocks
and
bonds. Individuals could invest their funds in a savings
bank,
purchase bonds, lend money to other individuals, or invest
in
silent partnerships. The government hoped the development
of
these new investment opportunities would boost
enterprise-profit
and personal-income incentives, encourage voluntary
savings by
enterprises and the population, funnel more capital to
efficient
enterprises and more productive endeavors, and conversely
reduce
the capital flow to inefficient enterprises and wasteful
projects. In 1989 it was still uncertain whether these
reforms
would produce the desired effects.
The government allowed agricultural cooperatives to
issue up
to 200,000 forints (approximately US$3,225) in bonds to
members
as well as nonmembers beginning in 1984, and the
authorities
later expanded the right to issue bonds to industrial and
other
enterprises. In 1987 enterprises issued bonds worth about
US$354
million, up from US$87.3 million the year before. Bond
issuance
accounted for about 7 percent of total private savings and
about
10 percent of total investment. By early 1988, banks,
enterprises, local councils, agricultural and industrial
cooperatives, hospitals, and other entities had issued
about
US$500 million in bonds. About 100,000 individuals owned
60
percent of the bonds; institutions held the remainder.
Returns
ranged from 9 to 12 percent and were higher than the
interest
paid on savings accounts. The government taxed interest on
bonds
issued after January 1, 1988, at a flat rate of 20
percent.
In early 1987, the government legalized the
capitalization of
enterprises through the sale of stock without prior
authorization. By early 1988, investors had purchased
about
US$555 million worth of stock in sixteen banks and about
fifty
enterprises and joint ventures. In the same year, about
twenty
financial and banking institutions founded a small stock
exchange. The exchange opened for trading only once every
two
weeks, but its founders hoped to expand its operation and
introduce a fully computerized trading system. Trading was
limited because the government, through the Hungarian
National
Bank, owned most of the shares. By 1989 at least one
enterprise
had launched an employee stock ownership plan, and the
government
had proposed a law lifting existing restrictions on
employee
stockholding in order to tap uninvested individual savings
and
give employees a sense of common purpose with their
enterprises.
The opening of stock and bond markets prompted former
Ministry of
Finance employees to create a private company to perform
independent assessments of individual enterprises.
Data as of September 1989
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