Successfully investing in Hungary


last updated on 16 June 2023 | reading time approx. 6 minutes




How do you assess the current economic situation in Hungary?

The overall economic situation continued to improve in 2022 compared to the previous year despite ongoing sup­ply shortages and uncertainties – caused, among other things, by the war in Ukraine – although the good start to 2022 weakened noticeably towards the end of the year. Annual gross domestic product grew by 4.6 per­cent in 2022. In the difficult environment, the Hungarian government has succeeded in generating further com­pa­ny relocations and site expansions through broad-base support measures. Measures such as maintaining the reduction in sales tax of the construction and renovation of residential real estate from 27 percent to 5 percent, significantly raising minimum wages, wage raises in the public sector, and price caps on basic commodities led to an increase in consumer spending. For 2023, however, an increase in gross domestic product of less than 1 percent is expected.

In general, it can be assumed that the economic environment will deteriorate in 2023. The unemployment rate was 3.6 percent at the end of 2022 and a slight increase is expected for 2023. The rising inflation, which is cur­rent­ly almost 20 percent and above the current wage increases in Hungary, is currently leading to a loss of pur­cha­sing power and the rising interest rates will also have a negative impact on growth and economic develop­ment. The medium and long-term economic effects of the Ukraine conflict can also hardly be estimated at the moment. Hungary's imports from Russia relate in particular to the energy sources gas and oil with around 85 per­cent of Hungary's gas imports and 65 percent of its oil imports currently coming from Russia. The current framework agreement with a term of 15 years was signed with the Russian government and Gazprom in autumn 2021, so the country's energy supply should be secure for the time being. On the basis of special EU regu­la­tions, Hungary is entitled to continue to obtain a large part of its energy requirements from Russia. To ensure energy security in the coming years, 2 new nuclear power units at the Paks nuclear power plant are being built –­­ under the leadership of the Russian Rosatom Group – which are scheduled to go into operation in 2030.

How would you describe the investment climate in Hungary? Which sectors offer the largest potential?

Hungary is currently a low-wage and low-tax country within the EU, although due to the lack of skilled workers, wage increases have regularly exceeded the inflation rate in former years and led to an increase in purchasing power for wages and salaries in the past, which trend evidently is currently about to reverse. With the reduction of the corporate tax rate to 9 percent and the relief for employers in the form of a further reduction in employer contributions to social security to 13 percent in 2022, further investment incentives have been created in recent years to encourage the settlement of companies. The average labor costs are currently only around a third of the German level and the dual training/study programs as well as cooperation between educational institutions and companies are becoming more and more extensive and help the integration of workforce into companies. Large-scale projects and investments in future technologies are currently being given preferential support by the government, and the investment promotion agency HIPA is increasingly trying to persuade foreign com­pa­nies to set up research and development activities.

Due to the uncertain outlook for global economic recovery, investments and construction projects that had al­ready been decided have been postponed by companies in recent years, but many of these have now been ta­ckled. Prominent examples of this are the new BMW production plant in Debrecen and the expansion of the Daimler plant in Kecskemét. Both plants are scheduled to start production in 2024 and 2025, respectively.
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 significant dependence on European and global economic develop­ment. The Hungarian automotive sector, including the supplier industry, generates almost 15 percent of Hungary's GDP. Around three quarters of the industrial goods produced in Hungary are exported. According to information from the Hungarian Ministry of Economic Affairs, almost 6,000 German companies are represented in Hungary and employ over 300,000 people.

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

The automotive sector continues to hold great potential. In addition to the manufacturers Audi, BMW, Mercedes-Benz, Opel and Suzuki, many suppliers have also settled in Hungary. It is also the government's de­clared goal to position Hungary as one of the most important locations in global battery production for electric vehicles in Europe. Numerous projects to build up production capacities that have been realized or have an­nounced in the last two years confirm this ambition. The most recent example is the laying of the foundation stone in April 2023 for the CATL battery cell factory in Debrecen, as well as the electric vehicle manufacturer NIO has started building up capacities in Hungary. Three of the world's largest electric battery manufacturers are already based in Hungary with production sites.

In the last 20 years, many international groups of companies 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, the electronics industry, food and beverage, logistics and online retail sectors.

The construction sector is likely to be weaker than in recent years. Government orders are currently declining and rising interest rates are weighing on investment projects in the private and commercial sectors.

What challenges do German companies face during their business ventures into Hungary?

For some years now, many companies in certain regions of the country have had difficulties to recruiting and retai¬ning 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 towards 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.

What role does the choice of location for Hungary play for foreign investors?

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 the 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.

In your opinion, how will Hungary develop?

A stable base of foreign direct investments is already in the country and other well-known companies such as Rheinmetall and 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 can be observed in Hungary and is still continuing. Based on current experiences, many companies are also endeavoring to reduce their depen­dence on the Asian region, to shorten their supply chains 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 and as reliable partners from the current economic and political situation.

Although the current global crisis is having a negative impact on the economy, we continue to expect good pos­sibilities and opportunities for our region. 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 and the com­­pa­nies based here would certainly 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.


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