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Hungary  Key facts Capital: Budapest Population: 10m Official language: Hungarian Currency: Forint GDP per capita: US$19,501 Hungary continues to work its way through an era of significant economic reform. The government announced a new structural reform programme in March 2011, which promises to reduce expenditure and eliminate the need for special taxes at the “crisis-tax” level. Hungary offers the same opportunities for domestic and overseas investors, in line with EU legislation. Economy Post-Communism, Hungary has moved fully from a centrally planned economy to a market-based one. According to Eurostat, the EU’s statistics office, its GDP for 2010 was 64% of the EU average, lagging behind the Czech Republic (80%) and Slovakia (74%), but ahead of Poland (62%) and Romania (45%). GDP is expected to grow by 2.7% in 2011 and 2.6% in 2012. Inflation is anticipated to be 4% in 2011 and 3.5% in 2012. Unemployment is predicted to decrease from the current figure of 11% to 9.3% in 2012. Hungary‘s large external debt, reliance on external financing and high level of foreign currency borrowing by its citizens meant its vulnerable economy was hit hard by the recession. The country was bolstered by borrowings from the IMF and other financial institutions, totalling €25.1bn. The new government has declined to negotiate a follow-on Stand-by Arrangement with the IMF, stating that it has the ability to meet its current and short-term funding needs through market financing. These loans have helped balance a large current account and budget deficit, prop up a partially overvalued currency, support a low stock of foreign reserve and secure a high level of short-term foreign currency debt. In short the package has boosted the economy’s stability and improved its long-term growth potential. Inward investment trends Hungary maintains an open economy and attracting foreign investment remains a stated priority for the Hungarian government. The Hungarian Constitution guarantees private ownership, right of enterprise, and freedom of competition. A substantial body of law protects foreign investment in Hungary, the most notable of which is the Foreign Investment Act of 1988. It grants full protection to the investments and businesses of foreign investors and guarantees that they will be treated in the same way as national investors. It also contains a repatriation guarantee under which foreign investors are free to remit profits and investment capital to their home country in the event of partial or complete termination of their business. Foreign direct investment in Hungary has helped modernise industries, create jobs, boost exports and spur economic growth. Cumulative foreign investment stock has totalled more than €75bn since 1989, the highest in the region on a per capita basis. The largest amount of foreign investment comes from Germany (22%), followed by Austria (14%) and the Netherlands (13%). Key sectors offering opportunities for overseas investors include: - Automotive - Electronics - Biotechnology - Renewable energy - Business support services The automotive sector is one of Hungary’s core industries and contributes 20% of total exports. Since the 1990s, several foreign car manufacturers including Audi, General Motors and Suzuki have set up production facilities in Hungary. In 2012, Daimler will open its new factory with an investment of €800m, while Opel will finish building its new engine factory, investing €500m. Other companies that have located operations there include GE, Alcoa, Bosch, ExxonMobil, GE, IBM, Morgan Stanley, Sony and Vodafone. EU funding Hungary has been allocated €25.3bn of EU investment for 2007-13. It plans to invest over €2.16bn in R&D and innovation, and is also committed to developing the country’s ICT infrastructure. Support for SMEs will amount to €829m, with €794m allocated for JEREMIE. JEREMIE is a recent initiative of the European Commission, the European Investment Fund and the European Investment Bank for improved access to finance for start-ups and SMEs. Hungary is one of the first countries to make use of this opportunity. Access to finance Ahead of the recent global financial crisis and recession, funding was readily available to businesses due in large part to a strong foreign presence and significant competition in the banking sector. Since the financial crisis, banks have increased their capital adequacy ratios above the required 8% and reduced loan-to-debt ratios. Lack of confidence in financial markets has affected Hungarian banks, many of which are now limiting foreign currency denominated lending; previously popular Swiss franc and Japanese yen loans have largely disappeared. There are reports that forint loans to businesses are also hard to obtain, as banks increase their debt-to-loan ratios, forcing them to promote deposits aggressively and limit lending to the less risky consumer loan sector. On the whole, foreign investors continue to have equal access to credit on the local market, with the exception of special governmental credit concessions such as small business loans. Markets for direct finance are thin. Capital markets The Budapest Stock Exchange (BSE) was re-opened in the summer of 1990 as the first post- Communist stock exchange in Central and Eastern Europe. The BSE currently has nearly 50 members, with 40 companies floating their securities on the primary and secondary markets, and the securities of more than 80 funds available to investors. Incentives for inward investment Hungary has a well-developed incentive system for overseas investors, the cornerstone of which is a special incentive package for investments over a certain value (typically €10m plus). The incentives are aimed at investors setting up facilities for manufacturing, logistics, R&D, bioenergy and tourism, as well as regional service centres. Incentive packages include cash subsidies, development tax allowances, training and job creation subsidies. Performance requirements, such as a minimum investment or job creation, may be imposed as a condition for establishing, maintaining or expanding an investment. There is no requirement that investors purchase from local sources, but the EU Rule of Origin applies. Also, there are no restrictions on participating in government financed or subsidised R&D programmes, but the government imposes offset requirements on defence sector investments over €4m. Recent cuts in personal and corporate income tax rates are intended to help stimulate domestic consumption and attract investment. Other tax incentives include: - capital gains participation exemptions - tax allowances for SMEs - development allowances - tax benefits on R&D, software development and the production of motion pictures - tax exemptions in preferred regions and/or industrial parks. Taxpayers can reduce their pre-tax profits by 50% of the royalty income arising. Furthermore, there is no withholding tax on dividends, royalties and interest payments between corporate entities from a Hungarian source. In order to attract real estate investors, companies with over US$53.5m registered in Hungary are exempt from corporate income tax and local income tax. In January 2011 the Hungarian government launched the New Szechenyi Plan, which will allow companies to apply for up to 100 state subsidies, totalling HUF1,100bn. Tax regime The Hungarian government introduced crisis taxes targeting the banking, energy, telecommunications and retail sectors in June 2010. Manufacturing, a sector clearly valued by the Hungarian government, was not targeted. The crisis taxes were unveiled as three-year, limited duration, extraordinary measures, enabling the government to shore up its budget until more long-term, structural changes were made. In March 2011, a structural reform programme was announced, which promises to reduce expenditure and eliminate the need for crisis taxes. Obstacles to inward investment Commercial law in Hungary is well developed, but most analysts see a need to continue revising the corporate legal code and improve the judicial and administrative capacity for enforcing it. There continue to be complaints from foreign investors about the slow pace of the judicial system. |
