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Successfully investing in Hungary

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last updated on 19 May 2021 | reading time approx. 5 minutes

 

 

 

How do you assess the current economic situation in Hungary?

The Hungarian economy grew by almost 5 per cent in both 2018 and 2019, and for 2020 – even before the effects of the Corona pandemic became apparent – renewed growth of 3 to 4 per cent had been forecast. The economy also started 2020 convincingly, but the positive trend quickly turned and already in the first quarter GDP was only 1.9 per cent and reached its low point in Q2 with a minus of 13.7 per cent. Finally, at the annual level, a recession of -5.1 per cent was achieved. For 2021, the Hungarian National Bank (MNB) currently expects economic growth of 4 to 6 per cent again. The unemployment rate, which was (only) 3.4 per cent before the Corona crisis, rose to just below 5 per cent at the end of 2020, and for 2021 the unemployment rate is expected to fall to 4.0 per cent due to the expected revival of the economy.

The pandemic spread rapidly in Hungary in the spring of 2020 and on 11 March 2020 the government declared a state of emergency and introduced far-reaching restrictions and protective measures, some of which have since been relaxed or tightened again as necessary. Educational, sports and cultural institutions as well as the hospitality industry were closed and trade in non-essential goods and services ceased.

The automotive industry, manufacturing in general and the hospitality industry were mainly responsible for the sharp decline in GDP. In April 2020, production in many manufacturing sectors plummeted, partly as a result of production stoppages in the automotive industry. The economy was also negatively affected by the collapse in demand, interrupted supply chains and postponed investments.  

In mid-April 2020, a model of short-time work was introduced, which is, however, very limited in time. Temporary wage subsidies and/or the exemption from/reduction of certain levies and taxes as well as a credit moratorium were also decided for certain sectors, some of which are still in place.

 

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

The reduction of the corporate tax rate to 9 per cent in 2017 and the relief for employers in the form of a further reduction of employer contributions to social security from 17.5 to 15.5 per cent as of mid-2020 have created further investment incentives to promote the establishment of companies. Large-scale 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. Also, one of the lowest wage levels within the EU certainly represents a locational advantage for foreign direct investment. Hungary can certainly be regarded as a low-wage and low-tax country within the EU, 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.  

However, due to the uncertain outlook regarding the global economic and cyclical recovery, the propensity of companies to invest has been slowed down, just as already decided investments and construction projects have been postponed. Prominent examples are the planned new BMW production plant in Debrecen and the expansion of the Daimler plant in Kecskemét.

Hungary's economy is strongly linked to the German economic area and especially to the automotive industry, which results in a considerable dependence on European but also global economic development. The Hungarian automotive sector, including the supplier industry, generates almost 15 per cent of Hungary's GDP.  

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

In addition to the very favourable fiscal conditions, the legal framework is also stable and provides a reliable basis for economic activities in the country. The regulations of Hungarian company law and the Hungarian Civil Code are comparable to those of Germany. The Hungarian labour law allows a high degree of flexibility in terms of working hours and remuneration and can be described as employer-friendly overall.

The automotive industry continues to hold great potential. In addition to the manufacturers Audi, Mercedes-Benz, Opel and Suzuki, many suppliers have also settled in Hungary. From Bosch to Knorr-Bremse to Zollner: the big names are represented, but many medium-sized companies have also settled in Hungary over the past 25 years. Dual training according to the German model has been promoted for years and is now practised by many companies. Many companies have also relocated considerable parts of their research and development facilities, IT and SSC staff units to Hungary, which indicates, among other things, the availability of corresponding skilled workers.

Hungary's strong focus on the automotive sector, among others, has led to a declining order book and underemployment in many sectors due to the current crisis. In order to avoid a wave of employee lay-offs, a regulation was adopted based on the German model for the introduction of short-time allowances, which in reality, however, can unfortunately only be compared to the German model to a limited extent.

 

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 recruiting and retaining suitable skilled workers in the long term. Especially in the regions close to the borders with Austria and Slovakia, there are many who work as commuters in neighbouring countries because of the higher salaries or who have moved to other EU countries. In addition, there are new industrial settlements that may well result in a loss of employees. Thus, the search for and retention of personnel may prove to be a challenge that should not be underestimated.

Investors should always be aware – especially in the current Corona crisis – that despite the generally positive attitude of the government towards investment projects and despite the generally favourable framework conditions, burdensome measures such as special taxes on certain sectors do exist (e.g. in the retail sector) or could be expanded. In any case, past experience shows that the government sometimes tends to favour 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 the good availability of skilled workers and good transport connections, public incentives also play a certain role in the selection of new locations. When choosing a location, a few kilometres 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. There is a clear west-east divide in subsidies with the strongly developed western Hungary, the capital Budapest and the rather structurally weak eastern Hungary. Investors who settle in favoured commercial zones are often also entitled to local tax reductions. Discussions should therefore be held in good time with the municipalities of potential locations.

 

In your opinion, how will Hungary develop?

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 favourable wage level and the consistently good level of education certainly speak in favour of Hungary as an investment location. The trend that Asian companies are also increasingly choosing new locations in Europe is also noticeable in Hungary and is continuing. Based on current experience, many companies are striving 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 development will shift somewhat due to the current global crisis situation, but we still expect very good possibilities and opportunities for our region.

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Dr. Roland Felkai

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