Openness to Foreign Investment
Hungary maintains an open economy and attracting foreign investment remains a priority for the Hungarian government. American companies have invested more than $9 billion in Hungary since 1989. There are approximately 800 wholly U.S. owned companies in Hungary – with representatives of many of the Fortune 500 firms.
Recent Financial Market Turmoil:
Despite declining budget deficits over the past two years, concerns about Hungary’s macroeconomic vulnerabilities – in particular its high debt-to-GDP ratio and external liability position – caused Hungary to become one of the first emerging markets to suffer from the fallout of the global financial crisis. Investor risk aversion and global de-leveraging caused liquidity pressures in Hungary’s financial markets and created significant stress in the government securities market. The de-leveraging contributed to a significant weakening of the forint, and on October 22, the Hungarian National Bank increased the policy rate by 300 basis points to fend off a potentially destabilizing swing in the exchange rate.
As external financing conditions worsened, in October and November 2008 international credit rating agencies downgraded Hungary’s long-term foreign currency credit rating. According to one credit rating agency, “recent international credit market dislocations, and more importantly, the prospects for a prolonged phase of heightened risk aversion and de-leveraging, will considerably complicate the task of policy-makers and will impose very severe macro-economic and financial adjustment. Since the onset of the global liquidity crisis, the country’s access to external market-based funding has been much more constrained than previously.”
In November 2008, Hungary concluded a USD 25.1 billion IMF/EU/World Bank loan package to help (i) reduce the government’s financing needs and improve long-term fiscal sustainability; (ii) maintain adequate capitalization of the domestic banks and liquidity in domestic financial markets; and (iii) underpin confidence and secure adequate external financing.
The Hungarian government agreed to undertake a number of financial stability measures, and under the terms of the IMF Stand-By Agreement, has agreed to accelerate fiscal consolidation efforts in order to further reduce the 2009 budget deficit to 2.6 percent. As a result of lower domestic consumption and reduced demand for Hungarian exports, however, output is expected to contract in 2009. Greater-than-expected economic slowing in important Western European export destinations caused analysts to project recently that the Hungarian economy may contract as much as 3 percent in 2009. The IMF estimates that growth is not expected to reach its estimated potential of 3 percent until 2011.
Economists and businesses say that additional reform is urgently needed to help Hungary remain competitive in the region, and to enable Hungary to meet its economic growth potential. These reforms include reducing the tax burden on labor, shrinking the size of the informal economy, and undertaking reforms to help reduce Hungary’s high redistribution rate, including reforms in the healthcare and education sectors, as well as the pension and social assistance systems.
The global financial crisis is also having an effect on the real economy in Hungary, as decreasing exports and lower domestic consumption, coupled with the unavailability of credit, are adversely impacting businesses in Hungary. A number of companies have announced layoffs and temporary production stoppages. 2008 unemployment is expected to be approximately 7.9 percent, and some analysts predict the unemployment rate for 2009 to be approximately 9.5 percent.
Framework for Foreign Investment:
Since 1989, Hungary has undergone a dramatic transformation from a centrally planned economy to an open, pro-business economy. In 2004 it became a member of the European Union. The Hungarian Constitution guarantees private ownership, right of enterprise, and freedom of competition. The government engages in reasonably transparent regulation. The government is planning to complete the deregulation of Hungary’s gas and power markets in 2009 and gradually phase out price subsidies, except to those with a demonstrable need. On-going liberalization has been extensive. As a result, the private sector produces about 80% of Hungary’s output. Financial markets are highly developed and smoothly operating, and reflect a level of sophistication indicative of an early reformer in the region.
The Ministry of Economic Affairs established the Hungarian Investment and Trade Development Agency (ITDH) in 1993, and this agency continues to help companies looking to make major investments in the country. ITDH has set up a “one-stop-shop” service for potential large investors to maintain a competitive environment and attract multinational companies. The government has a National Development Program II (NDPII) for channeling EU development funds and the Smart Hungary investment incentive program, aimed at facilitating investments in key areas for development, especially in the less developed regions.
The government has reinvigorated its Investors’ Council that was originally established in 1998 and practically dormant in the intervening years. Co-chaired by the Minister of Economy and a leading private sector business executive, it is made up of the largest investors, including foreign investors, economists, NGO’s, and business chambers. In announcing its reactivation, the government asserted that it intends to take seriously their suggestions and proposals. Many view this measure as an attempt to stem Hungary’s diminishing competitiveness and dimming attractiveness to foreign investors. A growing lack of predictability in raising taxes and a sense that the GOH does not particularly value the needs of foreign investors regarding transparency and predictability are two of the top issues affecting Hungary’s ability to attract new investment.
A substantial body of laws protects foreign investment in Hungary, provides national treatment and enables profit repatriation. The most important are the 1988 Law on Business Organizations, as amended in 1997 (no. CXLIV), the 1990 Law on Enterprise, the 1992 law on transforming state companies into economic associations, the 1990 and the 1996 Competition Laws, and the 1995 Privatization Law. Other important laws include the 1991 Law on Bankruptcy, the Law on Securities, and the 1994 Law establishing the Commodity Exchange. Legislation is uniform for all investors regardless of their origin. Institutions and procedures are in place to ensure compliance with legislation and competition rules. The applicability of these laws extends without differentiation to domestic and foreign investors.
The most notable legislation protecting both foreign and domestic investors is the Foreign Investment Act of 1988. It grants full protection to the investments and businesses of non-Hungarian resident investors and guarantees that investors will be treated in the same manner as national investors. The Act 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 enterprise.
Commercial law in Hungary is relatively well developed; however, most analysts see both a need to continue to revise the corporate legal code and to improve the judicial and administrative capacity for enforcing it. The Embassy notes with concern that one large American investor has an on-going court case for five years. The need for timely judicial due process is critical for foreign investors.
Up to 100 percent foreign ownership is permitted with the exception of designated "strategic" holdings in some defense-related industries. The current government’s renewed privatization concept is opening some of the strategic holdings to private participation. Foreigners investing in financial institutions and insurance must officially notify the government but do not need advance authorization. Foreign financial institutions may operate branches and conduct cross-border financial services in Hungary, in keeping with OECD commitments. Currently, foreign firms control 2/3 of manufacturing, 90% of telecommunications and 60% of the energy sector. The Hungarian Privatization and State Holding Company (APV) manages and privatizes state-owned properties, with Ministry of Finance approval for the banking sector. Apart from its tax policy, Hungary aggressively seeks foreign investment, encouraging investors both to purchase privatized firms and to implement “greenfield” investment, giving them full rein to manage the companies.
Ownership in Hungary is considerably more concentrated than in the U.S. It is common for one or two stockholders to have a controlling stake in even large corporations. Crossholdings are common and the independence of directors sometimes difficult to establish.
Land-Ownership Restrictions: Under the Investment Act, a company incorporated in Hungary may only acquire real estate "required for its economic activities," but this has been broadly interpreted and has not prevented foreign entrepreneurs from engaging in property development. The 1994 Land Law restricts the purchase of land by foreigners to 6,000 square meters, but allows for leases of up to 300 hectares for a maximum of 10 years. Only private Hungarian citizens and EU citizens resident in Hungary and engaged in agricultural activity can purchase farmland, while others may lease it. Restrictions on foreigners buying land will remain in force for seven years following EU membership and it is possible they could be extended for an additional three years.
Conversion and Transfer Policies
The Hungarian forint (HUF) has been convertible for essentially all business transactions since January 1, 1996. As a legal obligation of its EU membership, Hungary must eventually adopt the euro. Hungary complies with IMF Article VIII and all OECD convertibility requirements. Act XCIII of 2001 on Foreign Exchange Liberalization lifted all remaining foreign exchange restrictions and allowed free movement of capital in line with EU regulations. Foreign currencies are freely available in all banks and exchange booths. In 2001, Hungary adopted an exchange rate intervention band of +/-15 percent around a benchmark rate against the Euro. In order to allow the Hungarian National Bank (MNB) to exclusively focus on its inflation target of 3 percent, in February 2008 the MNB adopted a free-floating exchange rate regime. Since that date market forces determine the HUF exchange rate to the Euro and other currencies. Although Hungary’s most recent updates to its 2006 Convergence Program does not set a target date for adapting the Euro, it defines the roadmap to meet the Maastricht criteria, a condition to joining ERMII. Currently the biggest obstacles include Hungary’s large public debt and a central bank interest rate well above that of the Euro zone. The budget deficit and rate of inflation show a declining trend. Analysts expect Hungary to adopt the Euro in 2013-2014.
Short-term portfolio transactions, hedging, short and long-term credit transactions, financial securities, assignments and acknowledgment of debt may be carried out without any limitation or declaration. While the Forint remains the legal tender in Hungary, parties may settle financial obligations in foreign currency.
Hungarian legislation allows for profit repatriation and re-investment. The timeframe for remittances are in line with the financial sector’s normal timeframes (generally less than 30 days), depending on the destination of the transfer and if corresponding banks are easily found. There is no limitation on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property, or imported inputs.
Expropriation and Compensation
A 1990 Constitutional amendment provides full range protection against expropriation, nationalization, and any arbitrary action by the government except in cases of acute national concern. In such cases, immediate and full compensation is provided to the owner. There are no known cases where the Hungarian government has discriminated against U.S. investments, companies or representatives in expropriation, nor any policy shifts that would likely lead to cases in the near future.
Following the change of regime in 1990, the Government of Hungary enacted a compensation program for persons who lost property under both the fascist and communist regimes. Hungarian and foreign citizens were eligible to receive compensation coupons that could be sold or exchanged for privatized shares of government companies, real estate, or annuities. The Hungarian government intends to conclude the program by exchanging the 7-9 billion HUF worth of coupons still on the market (out of a total of HUF 140 billion) for shares in the Forrás Investment Fund. Coupons can also be sold on the Budapest Stock Exchange.
In April 1997, Parliament also passed a Jewish Compensation Act to return property stolen from Jewish victims of Nazism and Communism. Monetary compensation and some property were turned over to the Jewish Public Heritage Foundation and to Jewish victims of the Holocaust. To receive compensation, individuals must make claims before the act expires in 2011.
Hungary has an independent judiciary and fairly well developed commercial-law system. The legal process can be quite lengthy, however, as noted in an earlier section. The lack of legal and/or commercial experience by judges contribute to the lengthy delays and the judicial system’s apparent lack of concern for the timely resolution of commercial cases. Hungary modernized its court system as of January 1, 2003. A new level has been added to the previous three-level court system, which consisted of Local Courts, Courts of Appeal, and the Supreme Court. In order to decrease the workload of each court and, as a consequence, reduce the time of the appeal process, the Parliament established five regional courts called the High Court of Justice. EU membership empowers private parties to appeal violations of EU rights or regulations directly to EU bodies, providing another means of redress in potential disputes. Investment disputes are infrequent and do not reflect a pattern in Hungary. Mediation is spreading, but is not yet a widely used means to settle disputes.
The Embassy calls attention to a growing trend that Hungary’s often contentious political infighting is beginning to affect Parliament’s ability to fine tune commercial legislation, e.g., through amendments or clarifications of existing legislation. For example, only after arduous five party negotiations was an amendment successfully enacted that would grant radio license extensions to two foreign owned radio operators rather than subjecting both investors to re-tendering the radio licenses as called for in the existing law. Hungary’s laws regarding radio licensing differ from those of both the U.S. and the EU. Re-tendering the original license does not allow the investors the flexibility of long range planning or predictability that the investment is safe. Citing a need for competition, however, Hungary’s President referred the amendment to the Constitutional Court for review, effectively mandating the re-tendering process to begin.
Contracts can include sole arbitration by a foreign court. Contractual rights have to be met and failure to do so can be challenged in court. Proceedings and rulings can be lengthy and the legal system is slow and overburdened. Courts and the prosecution are independent and there is no evidence of influence by the government.
The Act on Bankruptcy Procedures, Liquidation Procedures and Final Settlement, as amended in 1993, covers all commercial entities except banks (which have their own regulatory statutes), trusts, and state-owned enterprises. Bankruptcy proceedings can be initiated only by the debtor, provided he/she has not sought bankruptcy protection within the previous three years. Within 90 days of seeking bankruptcy protection, the debtor must call a settlement conference to which all creditors are invited. Majority consent of the creditors present is required for all settlement plans. If agreement is not reached, the court can order liquidation. The Bankruptcy Act establishes the following priorities of claims to be paid: 1) liquidation costs; 2) secured debts; 3) claims of individuals; 4) social security and tax obligations; 5) all other debts. Creditors may request the court to appoint a trustee to perform an independent financial examination. The trustee has the right to challenge, based on conflict of interest, any contract concluded within 12 months preceding the bankruptcy.
Hungary has accepted binding international arbitration in cases where the resolution of disputes between foreign investors and the state is unsuccessful. There are domestic arbitration bodies within the Hungarian Chamber of Commerce, the Ministry of Labor, and local municipal governments. Hungary is a member of the International Center for the Settlement of Investment Disputes (ICSID) before which it had no pending cases as of June 30, 2003. Hungary is also a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. In the last few years mediation has become a tool of increasing importance for dispute settlement to avoid lengthy court procedures.
Performance requirement/incentives are available to all enterprises registered in Hungary, regardless of the nationality of owners or location of incorporation, and applied on a systematic basis. To comply with European Union rules, the government of Hungary no longer grants tax holidays based on investment volume. Companies previously granted this incentive can still receive cumulative tax benefits up to 75% of the total investment volume for investments started before January 1, 2000 and 50% for subsequent investment until 2005.
Eligibility for incentives is regulated by GOH Decree 163/2001, as amended by 241/2002, in accordance with EU regulations. Incentives can be received by tendering procedures for: (1) R+D, employment, training; (2) economic sectors; or (3) regions. The government defines an intensity indicator for incentives, which is the maximum value of the total of various incentives in proportion to the present value of the investment. This can be higher for less developed areas or for small and medium sized enterprises (SMEs).
Smart Hungary is the government’s primary investment incentive program designed to induce companies already established in Hungary to: continue operations; foster profit reinvestment; accelerate the growth of manufacturing investments and increase the ratio of strategic services; promote Hungary’s regional role; strengthen the capital-attracting potential of underdeveloped regions; and drive the utilization of R&D and innovation skills in the entrepreneurial sector. Smart Hungary is compliant with EU regulations on competition and state aid and is managed by the Ministry of Economy and Transport.
Parliament enacted a new National Development Plan for 2007-2013. In the Framework of the New Hungary Development Plan (NHDP), Hungary will receive around 7,000 billion HUF (22,4 billion euros) from the EU. This will be complemented by the national public contribution amounting to 15% of the total available funding. Thus the Hungarian government will add to this amount around 1,000 billion HUF. Projects using EU structural and cohesion funds will be subject to a series of requirements, including a portion of own-source financing. As these programs become implemented, the inflow of EU funds will create numerous opportunities for investment. In an attempt to ease the effects of the global financial crisis, the GOH initiated an economic stimulus package worth 1,400 billion HUF for businesses, including SMEs, that have been particularly affected by the unavailability of credit. In the current climate, loans have been hard to obtain even for SMEs with good credit histories, and expiring loans have been hard to renew. The package includes a HUF 377 billion liquidity package (micro loans, SME loans, Hungarian Development Bank loans), a credit guarantee of HUF 76 billion, as well as interest and venture capital subsidies from the New Hungary Development Program and the New Hungary Rural Development Program. The division of EU Resources for the Sectoral Operative programs is as follows (2007-2013):
|Sectoral Operative Programs||Billion HUF|
|Electronic Public Administration||99,49|
|National Performance Reserve||98,38|
|Regional Operative Programs||1620,59|
Performance requirements, such as job creation or investment minimums, can be imposed as a condition for establishing, maintaining, or expanding an investment. There is no requirement that investors purchase from local sources, however the EU Rule of Origin applies. The government imposes “offset” requirements for defense sector investments over one billion forint. Investors are not required to disclose proprietary information to the government as part of the regulatory process. There are no restrictions on participation in government financed or subsidized research and development programs.
Visa, residence, and work permit requirements are a lengthy and tedious hurdle but do not inhibit foreign investors’ mobility. Employment of foreign nationals must meet Hungarian Labor Code requirements.
Several business groups, including the American Chamber of Commerce, have called upon Hungarian authorities to do more to encourage foreign investments. Current government reforms focus on immediate reduction of the budget deficit, down from nearly 10% in 2006 to 3.3% in 2008. This requires short-term increases in revenues, affecting both the population and businesses, as well as structural measures reducing welfare expenditures. As a result of further budget tightening, the government expects the budget deficit to fall below 3% by 2009, thereby meeting the Maastricht criteria. In its austerity program, the government did not adopt tax reduction and reform proposals advocated by business groups as a means to increase Hungary's competitiveness.
There have been no complaints against Hungary related to any failure to fulfill any trade related investment measures (TRIMS) treaty obligation.
Right to Private Ownership and Establishment
The Hungarian constitution guarantees the right to private ownership. Foreign and domestic private entities may establish and own business enterprises and engage in all forms of remunerative activity, except those prohibited by law. Hungarian law guarantees the right of private entities to freely establish, acquire and dispose of interests in business enterprises. Many foreign companies operate through representative offices.
The Foreign Investment Act of 1988 grants full protection to the investments and businesses of non-Hungarian resident investors. The Act guarantees that investors will be treated in the same manner as national investors, and 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 enterprise.
The registration of business associations is compulsory in Hungary. All firms registered in Hungary are under the Court of Registration’s legal authority. The Court maintains a fully computerized registry, provides public access to company information and is developing an electronic filing system. The Court also enforces compliance with the Company Act, enacted in June, 1998, which compels registry courts to process applications to register limited liability and joint-enterprise companies within 30 days (60 days for unincorporated business entities). If the court fails to act in the period, the new company is automatically registered. The act eliminated separate registrations at the tax and social security authorities. The minimum capital required for a limited-liability company is HUF 3 million and for a joint stock company it is HUF 20 million. As of July 1, 2008 businesses may be established in one hour’s time electronically or by a simplified registration procedure. GOH announced the intention to decrease administrative burdens by 25% by 2012.
Protection of Property Rights
Secured interests in property (mortgages), both movable and real, are recognized and enforced but there is no title insurance in Hungary.
Intellectual Property Rights: Although the government has taken steps in recent years to strengthen protection of intellectual property rights, further improvement is needed. On January 1, 2003, Hungary acceded to the European Patent Convention and has amended the Hungarian Patent Act in accordance. It is a party to the WTO TRIPS agreement and most other major international IPR agreements, including the most recent WIPO copyright Treaty and the WIPO Performance and Phonograms Treaty. It is also a party to the EU Information Society Directive, and implemented the EU Enforcement Directive in 2005.The United States and Hungary signed a Comprehensive Bilateral Intellectual Property Rights (IPR) Agreement in 1993 that addresses copyright, trademarks and patent protection. A subsequent industrial property and copyright law entered into force on July 1, 1994, that significantly strengthened the domestic patent system. A new Copyright Law passed in June 1999 made necessary technical changes required by the WTO TRIPS Agreement.
The 1993 IPR agreement recognizes an exclusive right to authorize the public communication of works, including the performance, projection, exhibition, broadcast, transmission, retransmission or display of these works. It also requires that protected rights be freely and separately exploitable and transferable (contract rights), and recognizes an exclusive right to authorize the first public distribution, including import, for protected works.
Patent protection in Hungary covers the use, sale, offering for sale, and import of a patented product or products made using a patented process. The definition of infringement has been extended to include "supplying the means." A person who sells or offers to sell the means of producing a patented product is liable if that person is proven to have known that the means could be used for infringement. An example is the sale of decoder boxes that would allow the user to pirate a cable signal.
Under the revised Patent Act, effective January 1, 1996, an invention may be patented if it is novel and has industrial application. The patent application process takes from six months to one year, and patents are issued for a period of twenty years from the filing date. Foreigners applying for a Hungarian patent whose permanent residence is not in the European Economic Area (EEA) must be represented by an authorized Hungarian patent agent. Hungarian patent law conforms to the guidelines of the European Patent Convention, to which Hungary is a signatory.
Trademarks may be granted for any product-distinguishing sign capable of being graphically represented. They are issued for ten years and are renewable. The Hungarian Patent Office has competency over patent revocation and trademark invalidity proceedings, while all disputes related to the infringement of IPR fall under the jurisdiction of the courts.
In May 2004 the United States Trade Representative (USTR) announced that Hungary was placed upon the Special 301 Watch list of countries owing to weak enforcement and inadequately protected confidential pharmaceutical test data. The government of Hungary has taken some positive steps towards more complete implementation of its international obligations by putting into effect a ministerial decree to provide data exclusivity protection for pharmaceutical products authorized in the EU or Hungary after April 11, 2001.In January 2008, the GOH established a National Board Against Counterfeiting and Piracy, led by a government commissioner, the Hungarian Patent Office (HPO) and the Ministry of Justice (MOJ), with participation from other government agencies, various chambers, industry associations and NGOs. The Board established a strategy until the end of 2010, which was approved by the government in October 2008. Hungary remains on the Special 301 Watch list until further improvements are made to ensure prosecutors follow through with cases against IP infringers, and that judges are encouraged to impose deterrent-level sentences for civil and criminal IP infringement. U.S. copyright industries also report that Internet piracy in Hungary is a growing problem.
Transparency of the Regulatory System
The regulatory process in Hungary is relatively open and transparent. Tax, labor, environment, health and safety laws are consistent with EU regulations. Laws before parliament can be found on the parliament website. Legislation, once it is passed, is published in a legal gazette and available on CD. The government often invites interested parties to comment on draft legislation but does not always incorporate that input into final documents. Foreign investors would like to see more consultations between government and stakeholders in drawing up regulations. Some regulatory functions are delegated to professional associations, such as medical and legal associations. In addition, several permanent advisory committees may review draft laws and rules. However, in most cases the government has complete discretion over who sits on these boards, over whether or not the boards see draft decrees before they are promulgated and whether or not to accept the boards’ input in making final regulations. The bureaucratic procedures can be very lengthy.
There are some exceptional types of regulation in which consultation with the public is required. Most important among these are environmental and land use regulations. The Environmental Act (LIII/1995) and the Regional Development and Country Planning Act (XXI/1996) require the government to solicit input from affected parties. Open-ended public hearings are uncommon, and the courts generally cannot review administrative decisions. Some ministries are beginning to put draft rules and laws on the Internet and to invite comments, but this practice is not yet widespread.
A revised Public Procurement law came into force on May 1, 2004. The current Hungarian government extended the law to investments financed by the Hungarian Development Bank and increased the number of open tenders. Companies operating in subsidies or price-regulated sectors may suffer due to insufficient transparency and responsiveness in the setting of prices or subsidies. In response to continued international criticism regarding Hungary’s procurement laws and practices, a bill to modify existing public procurement legislation and make it more transparent was passed by Parliament in 2008. Parties requesting bids will be required to post information on their websites about the project and results of the public procurement process. Additionally, bids will need to indicate all subcontractors that will be used and how they will participate in the project. The new law also simplifies the current process by reducing the amount of paperwork for bidders.According to Transparency International’s National Integrity Study, systemic corruption adds as much as 20-25 percent to the costs of government procurement. A Freedom House study estimates that only 10 percent of government procurements are transparent. Government procurement reform is a major topic of discussion among foreign chambers and business groups that have provided input and suggestions to the GOH for inclusion into draft legislation. The Accounting Law of 2000 and subsequent modifications were designed to bring Hungarian financial reporting standards and practices in line with the International Accounting Standards and the EU Fourth and Seventh Directives. Under the latest modification, effective January 1, 2005, listed companies under the scope of Decree 1606/2002 of the EC are obliged to prepare consolidated financial statements in accordance with international financial standards, except for companies which are subsidiaries of a parent company already preparing a consolidated annual report.
Efficient Capital Markets and Portfolio Investment
Prior to the global financial crisis, capital adequacy was not an issue in Hungary as funds were readily available for businesses due in large part to a large foreign presence and significant competition in the banking sector. Currently, however, banks are increasing their capital adequacy ratios to well above the required 8%, and are reducing loan-to-debt ratios as well. Lack of confidence in financial markets affected Hungarian banks, many of which are now limiting foreign currency denominated lending, and previously popular CHF and JPY loans have largely disappeared. There are reports that HUF loans to businesses are hard to obtain as well, 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. Volumes on the stock exchange declined and the BUX plummeted to just above 12 thousand, abut 50% of the previous average index. The government securities market was also affected by the deleveraging associated with the global financial crisis, causing the Debt Management Authority to postpone regular auctions at least through the first quarter of 2009.
Hungary still has an impressively modern financial sector. In April 2000, the responsibilities of the Bank Supervisory Board were merged with the state insurance and pension supervisory agencies to form the Hungarian Financial Supervisory Authority (PSZAF). This body is a consolidated financial supervisor regulating all financial and securities markets. The PSZAF is independent, self-financing and well staffed, but lacks the ability to issue new regulations that carry legal force. In order to increase its ability to better foresee possible problems in the financial sector in 2009 the GOH is planning to increase the PSZAF’s authority.
Price Regulation and Liberalization
The Price Act of 1990 authorizes the government to determine compulsory prices when the Competition Act fails to protect interests of consumers. This sets the upper or lower price limit for certain goods and services to be established by a relevant government authority.
Foreign companies operating in price-regulated sectors, such as energy and pharmaceuticals, have suffered decreased margins due to government delays in adjusting prices upward and extending subsidies to new drugs. Multinational pharmaceutical firms claim to have spent considerable time negotiating with the Ministry of Health with little effect on the price and reimbursement policies of the national health system. Pharmaceutical companies see the current government plan for pharmaceutical subsidies as impractical. Reducing pharmaceutical subsidies and an increasing preference for generics is expected to lower profit margins.
Substantial market deregulation has occurred over the past few years. The electrical market is being unbundled and largely privatized. In June 2003, the Hungarian government passed the Gas Act, which provided the framework for gradual liberalization of the natural gas market from January 2004. On the other hand, that same Act has arguably reduced the political autonomy of the Hungarian energy regulatory office. In 2007 the GOH initiated electricity and natural gas market liberalizations, both of which are slated for completion in 2009, although the Hungarian Energy Office will continue to regulate gas prices.
The two-tier banking sector was established in 1987 when commercial banking functions were separated from the National Bank. Since then, the banking system has undergone significant development and is now comparable to that in western economies.
According to the current National Bank Law, the primary objective of the national bank is to achieve and maintain price stability. The benchmark is set monthly by the Monetary Council and is currently set at 10.0%, but if the Council continues its current trend to roll-back its October emergency 300 basis point increase, some analysts predict it dropping to as low as 7 percent by the end of the 2009. On May 1, 2001, the Central Bank and the Finance Ministry decided to float the exchange rate within a band of +/- 15%. As of February 2008 they jointly decided to introduce a fully free-float regime which enables the Central Bank to follow an exclusively inflation targeting monetary policy.
Following 2004 privatization, over two-thirds of the Hungarian banking sector is foreign owned. It is a very competitive sector with outstanding profitability, although the Hungarian Banking Association reports a significant decrease in profits is likely in 2008 and 2009. Capitalization is 10.87%, over 0.5% higher than the EU average. In the first half of 2008, the return on assets (ROA) was 2.29% and the return on equity (ROE) was 1.18% (compared to an 8.3% ROE in the EU-15). In September 2007, the share of non-performing loans was low at only 1.6% percent of total assets. Hungary’s financial regulations meet EU standards. Cross border services were enabled even before accession to the EU in May 2004. According to the Financial Supervisory Authority, about 43 credit institutions gave notification of their intent to enter into cross-border activity. The PSZAF and the Banker’s Association are actively facilitating preparations for Basel II regulations.
Concentration in the banking sector is very high with about 84% of total assets concentrated in the ten largest banks. Their market share amounts to 85%. The eight largest banks in Hungary in 2008 include:
|OTP Bank Nyrt.|
|CIB Közép-Európai Nemzetközi Bank Zrt.|
|MKB Bank Zrt.|
|RAIFFEISEN BANK Zrt.|
|Kereskedelmi és Hitelbank Zrt.|
|ERSTE BANK HUNGARY Zrt.|
|UniCredit Bank Hungary Zrt.|
|BUDAPEST Hitel-és Fejlesytési Bank Nyrt.|
Foreigners do not need government approval to establish bank subsidiaries or to establish more than a 10% stake in existing banks. Foreign or Hungarian credit institutions, insurance institutions, and investment companies may own up to 100% of a financial institution in Hungary. However, the upper limit for a single owner (foreign or Hungarian) not falling into one of the above categories is 15%, stricter than EU norms. Since January 1998, foreign banks can establish branches in Hungary offering cross-border financial services.
Foreign-owned subsidiaries often have a competitive edge over Hungarian banks in customer service, although Hungarian banks have recently developed and promoted retail instruments to service their clients. Hungary's retail sector is still largely a cash-based economy. The use of checks was never widespread. Credit and debit card use and internet and Tele-banking is becoming more and more common. Many institutions conduct network banking through the Giro credit transfer system.
Although banks in Hungary entered the current period of market stress with strong solvency positions, liquidity pressures have emerged. In addition, the large number of Euro, Swiss Franc, and Japanese Yen denominated loans made to households in recent years have increased balance sheet risks for banks as the Hungarian Forint has weakened against these currencies in recent months. In its Letter of Intent to the International Monetary Fund as part of the financial stabilization package, the Government of Hungary announced a banking sector support package consisting of two funds – a Capital Base Enhancement Fund to help raise banks’ capital adequacy ratio and a Refinancing Guarantee Fund to guarantee the rollover of loans and wholesale debt securities to help promote interbank lending.
The 1996 Offering of Securities, Investment Services and the Securities Exchange Act and the 1990 Securities and Stock Exchange Act govern the public issuance and trading of bonds, shares and other securities. The Budapest Stock Exchange (BSE) has 30 members, which are licensed-broker or broker-dealer companies, including several U.S.-based firms. It is a full member of the Federation of International Stock Exchanges and an associate member of the International Securities Market Association. The total market capitalization in 2008 amounted to HUF 15276.5 billion, of which shares amount to HUF 3553.7 billion. Average daily turnover was 21.7 billion HUF, which is 39% lower than in 2007. BSE after tax profit amounted to HUF 2.16 billion, 16% higher than in 2007. In November 2005, the BSE integrated the Commodity Exchange, creating a commodities section. In December 2008 the BSE listed 44 equity issuers, 6 bond issuers, 3 mortgage bond issuers, 16 investment funds, and one Government bond and T-bill issuer. 66% of capitalization is concentrated in four companies (MOL, OTP, MagyarTelecom and Richter ).
Despite frequent protests over the past two years, political violence has not been a characteristic of the political landscape in Hungary. The transition from communism to democracy was negotiated and peaceful, and four peaceful changes of government via the ballot box have followed. There is little cause to expect insurrections, political terrorism, or interstate war. The Kosovo conflict, which began only days after Hungary's membership in NATO, did not result in any conflict within Hungarian territory despite its front-line status. There has been no violence directed against foreign-owned companies, although economic uncertainty has the potential to compound partisan divisions and to contribute to political extremism.
The Hungarian Ministry of Justice is responsible for combating corruption. There is a growing legal framework in place to support its efforts. Hungary is a party to the OECD Anti-Bribery Convention and has incorporated its provisions into the penal code, as well as subsequent OECD and EU requirements on the prevention of bribery. Hungary adopted a national strategy on combating corruption and passed two modifications of the Criminal Code in 2001 (Act CXXI and CIV). Parliament also passed the Strasbourg Criminal Law Convention on Corruption (Law XLIX of 2002) and the Strasbourg Civil Code Convention on Corruption (Law L of 2004). Hungary is a member of GRECO (Group of States against Corruption), an organization established by members of the Council of Europe to monitor the observance of their standards for fighting corruption. Transparency International is active in Hungary and its 2008 Corruption Perceptions Index rates Hungary 47th out of 102 countries (1st being best), more favorably than most other countries in the region, but worse than Hungary’s 2004 ranking of 34th.
Giving or accepting a bribe is a criminal offense, as is an official’s failure to report a bribery incident. Penalties can include confiscation of assets, imprisonment, or both. Since EU membership, legal entities can also be prosecuted. An extensive list of public officials and many of their family members are required to make annual declarations of assets, but there is no specified penalty for making an incomplete or inaccurate declaration. The 2003 “glass pocket law” extended the State Audit Office right to review businesses’ government contracts to public-private transactions that were previously considered “business-confidential”. Conflict of interest legislation prohibits members of parliament from serving as executives of state-owned companies.
While legislation is in place, persistent suspicion of corruption in some government procurement actions has arisen, due to a lack of transparency and an uneven implementation of the laws to prevent corruption. Non-governmental organizations, the business community, and foreign governments share many of these concerns, and maintain an ongoing dialogue with the government to identify strategies to improve conditions The GOH has also set up an Anti-Corruption Coordination Board, led by the Ministry of Justice, with participation from other government ministries, chambers and NGOs, which submitted a strategy and action plan to Parliament in 2008.
Hungarian legislation on combating money laundering is in line with international obligations. Act LXXXIII of 2001 on Combating Terrorism, on Tightening Provisions on Impeding Money Laundering widened the scope of the 1994 anti-money laundering legislation. Act XV of 2003 on Preventing Money Laundering increased the scope of business under the anti-money laundering legislation. It now includes financial and supplementary financial service providers, investment service providers, Stock Exchange-related activities, money transfers via postal service, real estate agents, auditors, tax advisors, casinos, retailers of precious metals, gems, antiquities, insurance companies, and lawyers.
Bilateral Investment Agreements
Hungary and the United States do not have a bilateral investment treaty (BIT), nor is one currently under negotiation.
Hungary has bilateral investment treaties with the following countries: Argentina, Australia, Austria, Belgium, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Finland, the Federal Republic of Yugoslavia, France, Germany, Great Britain, Greece, Indonesia, Israel, Italy, Kazakhstan, Kuwait, Luxembourg, Malaysia, Moldova, The Netherlands, Norway, Paraguay, Poland, Romania, Slovakia, South Korea, Spain, Sweden, Switzerland, Thailand, Turkey, Ukraine, Uruguay and Vietnam.
Hungary has tax treaties which eliminate many aspects of double taxation with the following countries: Albania, Australia, Austria, Belgium, Brazil, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Finland, the Federal Republic of Yugoslavia, France, Germany, Great Britain, Greece, India, Indonesia, Ireland, Israel, Italy, Japan, Kazakhstan, Kuwait, Luxembourg, Malaysia, Malta, Moldova, Mongolia, The Netherlands, Norway, Pakistan, Philippines, Poland, Portugal, Romania, Russia, Singapore, Slovakia, South Korea, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, Tunisia, Ukraine, the United States, Uruguay and Vietnam. Negotiations are currently underway to revise Hungary’s current tax treaty with the United States.
Hungary has relatively high individual income tax levels, with a maximum marginal tax bracket of 36 percent that applies to all income above 1.7 million forints, and an additional 4% to income exceeding 7.1 million forints. Corporate tax, at 16%, is low compared to most European countries; however businesses must also pay a 4% so-called “solidarity tax”. Foreign investors are also faced with relatively high personnel, local, and other indirect taxes, such as a value added tax (VAT) of 20%, pension and health care contributions. Tax rules allow 50% of the turnover-based 2% local tax payments to be deducted from the corporate tax. Despite the government’s pledge to gradually eliminate this type of tax, the high budget deficit in 2006 did not allow for easing of any type of taxation. New tax types were introduced in 2007, including an environmental tax and a vehicle registration tax, a compulsory minimum tax based on 10% of the turnover, with a rate of 2%, with lower rates available but the business has the burden of proof to demonstrate they owe less, and frequently would face a strict audit by tax authorities. In 2008, the government passed an 8 percent “Robin Hood tax” on profits of certain energy suppliers and trading companies. As several newly acceded EU members decreased both their corporate and personal income tax rates and/or switched to a one-tier tax system, Hungary faces strict competition in the region. Additionally, businesses sometimes complain that they are targeted for lengthy audits and competition investigations. Tax changes in the government reform program had the effect of abrogating certain preferential tax agreements for foreign investors. This has created a concern about the predictability of Hungarian tax policy. In addition, businesses continue to urge the government to undertake tax reform to reduce the tax burden on labor.
OPIC And Other Investment Insurance Programs
The U.S. Overseas Private Investment Corporation (OPIC) has operated in Hungary since October 1989, offering U.S. investors insurance against political risk, expropriation of assets, damages due to political violence, and currency inconvertibility as well as certain specialized insurance products. Political risk insurance is available for foreign-owned companies in Hungary from several private carriers and from the Multilateral Investment Guarantee Agency (MIGA). However, demand for such products has been limited given Hungary’s general political stability.
OPIC is now focusing on financing small businesses, in which commercial banks would not be interested. These are financing projects with a 5-10 year horizon, in amounts varying from as little as $100,000 to $1 million.
Hungary's civilian labor force of 3.9 million persons is highly skilled. Literacy exceeds 98 percent and about two-thirds of the work force has completed secondary, technical or vocational education. Hungary is particularly strong in engineering, medicine, economics, and science training. An increasing number of young people are attending U.S. and European-affiliated business schools in Hungary. Foreign language skills, especially in English and German, are becoming more widespread.
Hungary’s unemployment rate of 7.7% is substantially below both the European Union average and the unemployment rates in neighboring countries. The labor participation rate is still relatively low by European standards at around 56%. The northwest region of the country sometimes sees shortages of skilled workers, particularly in the financial and marketing sectors, but east of the Danube unemployment levels are above average, though the labor force is cheaper and comparably skilled. The government is now turning its focus to help education adapt better to labor market requirements and is encouraging cooperation between higher education institutions and the business arena. Wages in Hungary are significantly lower than those of Western Europe. Average Hungarian labor productivity is lower than the EU average, but greater than that of other Central and Eastern European economies. Employers now pay 23% social security contributions on top of wages. However, the base of payment is now double the minimum wage, unless the employer reports that an employee earns less than that.
A new Hungarian labor law, in force from July 1, 2003 makes several important changes to labor market regulation. The law applies stricter guidelines regarding which personnel may be employed as independent contractors and which must be considered employees (using a “service” agreement versus an “employment agreement”). Companies with an EU-wide presence must institute European works councils, which act as a mechanism for sharing information between labor and management.
Roles of Government and Trade Unions
A tripartite National Council for Interest Reconciliation is legally recognized by the Hungarian Labor Law (Labor Code XXII/1992). Members of the Council are representatives of employers, employees, and the government. In practice, the Council has six trade union representatives and nine employer representatives. The Hungarian minimum wage is set by agreement of all three parties. The law also requires the government to consult with the Council on issues affecting labor, such as health and safety. The Council is the only group that must legally be consulted on many labor issues, even though only about 25% of the workforce is unionized.
The Hungarian labor code guarantees the right to join trade unions and gives unions the right to operate inside a company. Unions are entitled to negotiate collective bargaining agreements. The current monthly minimum wage is HUF 71,500. The labor code limits the length of the workday plus overtime to 12 hours; guarantees maternity leave; provides for at least 20 days of annual leave; mandates at least 30 days notice prior to severance and requires severance pay for those employed at least three years. The law forbids discrimination based on gender, age or nationality. The minimum employment age is 16 years, though apprenticeships may begin at age 15. Hungary adheres to ILO conventions protecting worker rights. Labor/management relations are better than in much of Europe. As a result of the current economic situation, labor-related strikes are occurring with increasing frequency.
Foreign Trade Zones/Free Ports
The 1988 Law on Foreign Investment, the 1995 Law on Customs, Customs Procedures, and the 1995 Law on Foreign Currency permitted and regulated the operation of foreign trade zones. Prior to Hungary becoming a full member of the EU, 143 companies operated in about 130 customs free zones, producing about half of total Hungarian exports.
According to Law CXXVI of 2003, permits for operating in customs free zones expired. Currently no company operates in customs free zones and all of them transferred their assets and continued operation following customs handling of their assets. The Finance Ministry plans to nominate customs free zones, but currently there seems to be little demand for this service. Possible sites could include Székesfehérvár, Gyõr, Kecskemét, Miskolc, or Szombathely.
Foreign Direct Investment Statistics
According to the National Bank of Hungary, foreign direct investment between 1990 and the third quarter of 2008 amounted to 68.1 billion euros (which includes shares, other participation, and reinvested incomes valued at 62,9 billion euros and other capital movements at 5,2 billion euros). Foreign direct investment has been declining over the last few years. In 2006 FDI amounted to 5.7 billion euros, the second largest amount after a record of 6.2 billion in 2005. In 2007, however, net FDI declined to 4.4 billion euros. In the first three quarters of 2008 it amounted to only 2.3 billion euros. Leading foreign investors include Germany, Austria, the Netherlands and the United States. 35.7% of cumulative FDI in Hungary is in manufacturing, 15.5% in trade and retail, 14.6% in services, and 10.1% in financial activity. Hungary has a reasonably significant level of foreign investment abroad, primarily through acquisitions in other Central and Eastern European countries. By the third quarter of 2008, total Hungarian investment abroad amounted to 11.6 billion euros. The majority of this is directed to services and crude oil processing.
Of the U.S.’s 50 largest multinationals, 40 are present in Hungary. The following U.S.-based companies have made major direct investments here: GE, Alcoa, AES, Coca-Cola, O-l (Owens Illinois), General Motors, Guardian Industries, IBM, Lear Corporation, Pepsi Co, Sara Lee, Procter & Gamble, Visteon, Ford, Citibank, Emmis International, Emerson, Zoltek, PACCAR, Celanese, Exxon Mobil, EDS, Sykes, Jabil Circuit, McDonald’s, Burger King, National Instruments, AIG/Lincoln, HP, Cisco, Microsoft, Oracle, Johnson & Johnson, Pfizer, Lilly, Monsanto, Dow Chemical, to name a few.
Among the largest non-U.S. foreign investors in Hungary are: Deutsche Telekom, Audi, Telenor, Vodafone, E.ON, Sanofi-Aventis, Electrolux, RWE, Tesco Global, Suzuki Motor, Auchan, Hanook, Mercedes Benz, SAP, ABB, Philips, CP Holdings and Robert Bosch.