Successfully investing in Hungary

The overall economic situation clearly improved in 2021 compared with the previous year despite supply shor­ta­ges and uncertainties regarding the impact of the new pandemic variants. In the difficult environment, the Hungarian government succeeded in generating further company relocations and site expansions through broad-based support measures. In addition, tax relief was granted, among other things, to safeguard existing jobs. Other measures, such as the reduction of the sales tax for the construction and renovation of residential real estate from 27 percent to 5 percent, the promotion of home ownership for young families, and the sig­ni­fi­cant increase in minimum wages, led to an increase in consumption and to the recovery of the overall economic situation in recent years. The economy developed positively in 2021 and the start to 2022 was also decent, al­though the first effects of the Ukraine war on the economy became apparent from March 2022.  

 

In 2021, real GDP growth in Hungary was around 7.1 percent year-on-year. For 2022, real GDP growth in Hungary is currently still forecast at around 3.7. However, based on the current situation, this figure will certainly be revised downward by the authorities and institutes for the current fiscal year. The unemployment rate at the end of 2021 was just under 4 percent and some industries are having considerable problems finding suitable employees domestically. In general, it can be assumed that economic conditions will deteriorate, at least in the medium term. The rising inflation rate, higher interest rates as well as a variety of other factors will certainly have a negative impact on growth and the government will only be able to counteract this to a limited extent.

 

The medium- and long-term effects of the Ukraine conflict can hardly be assessed at present and depend, among other things, on the duration of the war, the sanctions taken and the outcome of the conflict. Hungary's imports from Russia relate in particular to the energy sources gas and oil; around 80 percent of Hungary's gas imports currently come from Russia. The current 15-year framework agreement with the Russian government and Gazprom was not concluded until the fall of 2021, so the country's gas supply should be secure for the time being.

The reduction of the corporate tax rate to 9 percent in 2017 and the relief for employers in the form of a further reduction in employer contributions to social security to 13 percent in 2022 have created further investment incentives to encourage companies to locate here. Large projects and investments in future technologies are currently being given preferential treatment by the government, and the investment promotion agency HIPA is increasingly trying to attract foreign companies to set up research and development activities. One of the lowest wage levels within the EU also represents a locational advantage for foreign direct investment. Hungary can certainly be considered a low-wage and low-tax country within the EU at present, although wage increases have regularly exceeded the rate of inflation in recent years, partly due to the shortage of skilled workers, and there has been an increase in the real value of wages and salaries.  

 

Due to the uncertain outlook for global economic recovery, however, the propensity of companies to invest has been curbed, and investments and construction projects already decided upon have been postponed. Pro­mi­nent examples of this are the planned new BMW production plant in Debrecen and the expansion of the Daimler plant in Kecskemét, as well as investment projects by the state and local authorities that have been postponed or canceled. 

 

Hungary's economy is strongly linked to the German or German-speaking economic area and in particular to the automotive industry, which results in a considerable dependence on European but also global economic developments. The Hungarian automotive sector, including the supply industry, generates almost 15 percent of Hungary's GDP.  

 

German companies are very important trading partners for Hungary, as a volume of almost 27 percent of total exports is realized with German companies and almost 25 percent of imports come from Germany. Hungary is one of the few countries with a positive trade balance with Germany.

 

In addition to the favorable tax regime, the legal framework is also stable and provides a reliable basis for economic activities in the country. The provisions of Hungarian company law and the Hungarian Civil Code are comparable to those of Germany. BGB are comparable to German regulations; Hungarian labor law allows a high degree of flexibility in terms of working hours and remuneration and can be described as employer-friendly overall. The fact that the government – particularly in industry – intends to restructure the labor law framework more in favor of employers was most recently demonstrated by the ordinance passed in April 2020 extending a working time framework that can be unilaterally determined by the employer from the previous 4 months to 24 months. 

 

The automotive sector continues to hold great potential. In addition to the manufacturers Audi, Mercedes-Benz, Opel and Suzuki, many suppliers have also settled in Hungary. BMW is also currently building its own pro­duc­tion facility in eastern Hungary with an investment of EUR 1 billion. Production is scheduled to start in 2025 and the company plans to employ around 1,000 people. It is also the government's declared goal to position Hungary as one of the most important locations in global battery production for electric cars in Europe. Nu­me­rous projects to build manufacturing capacity that have been realized or announced in the last two years con­firm this ambition. The most recent example is SK Innovation's announcement of the construction of a third battery cell factory in Hungary, and Korean supplier Samsung SDI is also expanding its battery factory in Göd. In addition to the Asian players, the resident German automotive groups are also investing ever larger sums in electromobility capacities in Hungary.

 

The construction sector is also currently booming, boosted by the reduction of VAT to 5 percent for newly built housing and renovations, as well as the home ownership subsidy. In the last 20 years, many international corporate groups have also relocated parts of their research and development facilities, IT and SSC staff units to Hungary. We also see potential in the machinery and plant engineering, food and beverage, logistics and online retail sectors.

For some years now, many companies in certain regions of the country have had difficulty recruiting and retai­ning suitable skilled workers over the long term. Particularly in the regions close to the borders with Austria and Slovakia, there are many who work as commuters in neighboring countries because of the higher salaries, or who have moved to other EU countries immediately. In addition, there are new industrial settlements, which may well result in a poaching of employees. Thus, the search for personnel as well as the retention of personnel can prove to be a challenge that should not be underestimated. 

 

Investors should always be aware that despite the generally positive attitude of the government toward in­vest­ment projects and despite the generally favorable conditions, burdensome measures such as special taxes on certain industries are quite conceivable. In order to stabilize the state budget in the current situation, such special taxes have been passed for the years 2022 and 2023 and affect, among others, the energy sector, the retail trade, the financial sector, the insurance sector and the pharmaceutical industry. Past experience also shows that the government sometimes tends to favor domestic companies and institutions in certain areas.

In addition to factors such as good availability of skilled workers and good transport links, public incentives also play a certain role in the selection of new sites. When selecting a site, a few kilometers can be decisive for eligibility for subsidies. While hardly any subsidies are granted in the greater Budapest area, there are often good opportunities to obtain purely Hungarian or EU subsidies in structurally weaker regions. In terms of sub­sidies, there is a clear west-east divide with the highly developed western Hungary, the capital Budapest and the rather structurally weak eastern Hungary. Investors who settle in favored industrial zones are often also entitled to local tax reductions. Discussions should therefore be held in good time with the municipalities of potential locations.

 

In order to make the structurally weak areas of Hungary more attractive to foreign investors, the National Investment Promotion Agency (HIPA) offers subsidies, such as a maximum of 50 percent direct subsidies or tax breaks if predefined conditions are met, such as the number of jobs created. There are also subsidies for large-scale investments based on individual government decisions.

A stable base of foreign direct investment is already in the country and other well-known companies such as BMW and some battery manufacturers are in the process of setting up production facilities in Hungary, which in turn will be followed by further settlements. The proximity to Germany, the good infrastructure, the favorable wage level and the consistently good level of education certainly speak for Hungary as an investment location. The trend that Asian companies are increasingly choosing locations in Europe is also noticeable in Hungary and is continuing. Based on current experience, many companies are also endeavoring to reduce their de­pen­dence on the Asian region and to relocate activities back to Europe. Hungary will certainly also benefit from this. It is quite possible that Hungarian companies and locations will emerge stronger from the current situation as reliable partners.

 

Overall, the standard of living in Hungary will continue to rise, and this will be accompanied by further in­crea­ses in wages and salaries. Unfortunately, the current global crisis situation will cause the development to shift somewhat, but we continue to expect good opportunities and chances for our region. For example, an end to the conflict between Russia and Ukraine could create good opportunities for EU companies in areas such as infrastructure reconstruction in Ukraine. Hungary would also benefit from this, as the large construction groups from the German-speaking countries are represented in Hungary and have the appropriate skilled personnel. For example, many steel structures for bridges are designed and manufactured in Hungary and installed on site throughout Europe.