BUDAPEST, Hungary -- Hungary took a small step backward in liberalizing its capital markets when it blocked plans by Templeton Asset Management Ltd. to market a family of its mutual funds in the country.
Templeton, based in San Mateo, Calif., had begun selling 32 Luxembourg-based funds to Hungarian institutional and retail investors in late December through OTP Securities Rt., a local brokerage firm. The funds invest in European and U.S. stocks and bonds.
But the National Bank of Hungary last month refused to renew the foreign exchange license OTP needed to continue selling the funds because the central bank didn't want capital leaving the country while international markets are so unstable. Hungary, whose currency is only partially convertible, requires funds to obtain special licenses to maintain accounts abroad.
The bank's action stunned Templeton executives, especially since Hungarians can invest abroad through several local funds.
Scratching their heads
"We really don't understand what happened," said Rafal Kwiatkowski, vice president of sales and marketing for Central and Eastern Europe at Templeton's Warsaw office. "We are very disappointed."
Mr. Kwiatkowski said the company is considering appealing the National Bank's decision. A reversal doesn't seem likely.
"I don't think (we'll change our minds)," said Ferenc Karvalits, managing director of the National Bank. "We want to make it clear that this is temporary. In another one and a half to two years, I'm sure we'll liberalize the market."
The National Bank was ready to liberalize in early 1997 when it granted OTP the foreign exchange license. OTP officials began looking for partners and began serious negotiations with Templeton executives a year ago. Sandor Czirjak, OTP deputy chief executive, said reaching an agreement was a long, complicated process because of language and legal differences.
Messrs. Czirjak and Kwiatkowski said they thought the license renewal would be just a formality.
Since the original license was granted, however, the world's markets have been roiled by meltdowns in Asia, Russia and Brazil.
"When the Asian crisis occurred, our strategy changed. We decided to slow down our liberalization," Mr. Karvalits said. "There is still a lot of risk in the market. We don't have long-lasting market experience and we want to make our liberalization steps very carefully."
No other brokerage firms ever applied for forex licenses, he said, since the central bank made it clear no new licenses would be given. It wouldn't have been fair to other firms, he said, to renew OTP's license since the bank has no intention of granting new ones. Bank officials, he said, thought OTP and Templeton wouldn't start selling the funds before the license expired because it was taking them too long to launch their funds.
The National Bank allows Hungarian firms to establish funds that could invest in foreign stocks and bonds, with the caveat that 15% of the money be kept in Hungary and that as soon as a foreign security is sold, the proceeds have to be immediately reinvested or brought home.
Mr. Karvalits said the moratorium on granting licenses enables officials to monitor capital being invested abroad, a luxury it would not have with foreign-owned funds.
Ironically, the six funds that invest abroad all are owned by Hungary-based subsidiaries of foreign companies. They expressed little sympathy for Templeton's plight.
"We asked the central bank if there was a chance for a license and they said no," said Peter Holtzer, managing director of CAIB Securities, owned by the Bank Austria Group. "We accepted the situation. We had to set up a (Hungarian-based) fund and we did it."
Templeton officials could decide to raise the decision of the National Bank with the Organization of Economic Cooperation and Development or the European Union. Hungary has been a member of the OECD since 1996 and hopes to join the EU by 2002. Such actions haven't been ruled out.
But Templeton executives said they don't want a contentious relationship with Hungarian authorities because they hope to be in business here eventually.
So far, foreign funds haven't proved overly popular with Hungarian investors. The combined assets of the funds are 12 billion forints ($56 million) out of the 330 billion forints invested in mutual funds.
Nor does the decision by the bank seem to signal anti-foreign sentiment. Indeed, some outside observers think it was a sound move.
Hungary's current account deficit is likely to grow to 5% to 6% of gross domestic product from 4% to 4.5% last year because of lessening demand for its exports because of the Russian crisis and sluggish European economies.
"Why take risks on liberalization when EU demand is slowing and you've lost the Russian market?" asked Charles Robertson, emerging Europe economist at ING Barings Ltd., London.