Hungary

Executive Summary

With a population of 9.8 million, Hungary has an open economy and GDP of approximately USD 159 billion.  Hungary has been a member of the European Union (EU) since 2004, and fellow member states are its most important trade and investment partners.  Macroeconomic indicators are generally strong: the economy grew by 4.9 percent in 2019.  In 2020, however, government-financed rescue packages to mitigate the economic impacts of the COVID-19 pandemic increased spending.  This, combined with reduced, or possibly negative GDP growth due to the pandemic, has led the Government of Hungary (GOH) to revise its 2020 budget deficit target from 1% to more than 3% of GDP at the time of drafting this report.  Ratings agencies maintained Hungary’s sovereign debt at two notches above investment grade in 2020.  Prior to the COVID-19 crisis the government kept the deficit below 2.5 percent of GDP from 2013 through 2019 and has lowered public debt from more than 80 percent of GDP in 2010 to 71 percent in 2018.  Ratings agencies upgraded Hungary’s sovereign debt to two notches above investment grade in 2020.

Hungary’s central location and high-quality infrastructure have made it an attractive destination for Foreign Direct Investment (FDI).  Between 1989 and 2018, Hungary received approximately USD 92 billion in FDI, mainly in the banking, automotive, software development, and life sciences sectors.  The EU accounts for 89 percent of all in-bound FDI. The United States is the largest non-EU investor. The GOH actively encourages investments in manufacturing and high-value added sectors, including research and development centers and service centers.  To promote investment, the GOH lowered the corporate tax rate to 9 percent in 2017 and the labor tax to 15.5 percent in July 2020, which is among the lowest rates in the EU. Hungary’s Value Added Tax (VAT) however, is the highest in Europe at 27 percent.

Despite these advantages, Hungary’s regional economic competitiveness has declined in recent years.  Since early 2016, multinationals have identified shortages of qualified labor, specifically technicians and engineers, as the largest obstacle to investment in Hungary.  In certain industries, such as finance, energy, telecommunication, pharmaceuticals, and retail, unpredictable sector-specific tax and regulatory policies have favored national and government-linked companies.   Additionally, persistent corruption and cronyism continue to plague the public sector. According to Transparency International’s (TI) 2019 Corruption Perceptions Index, Hungary placed 70th worldwide and tied with another country for 26th place out of 28 EU member states.  In 2016, the GOH withdrew from the Open Government Partnership (OGP), a transparency-focused international organization, after refusing to address the organization’s concerns about transparency and good governance. Both foreign and domestic investors are reporting pressure to sell their businesses to government-affiliated investors.  Those who refuse to sell claim they face increased tax audits or spurious regulatory and court challenges. Additionally, some executives in Hungarian subsidiaries of U.S. multinationals have noted that the GOH’s strong anti-migrant rhetoric and actions have negatively affected board members’ views of Hungary, making it more difficult for the subsidiaries to obtain approval for new investments.

Analysts remain concerned that the GOH may intervene in certain priority sectors to unfairly promote domestic ownership at the expense of foreign investors.  In September 2016, PM Viktor Orban announced that at least half of the banking, media, energy, and retail sectors should be in Hungarian hands. Through various tax changes, analysts say the GOH pushed several foreign-owned banks out of Hungary and increased Hungarian ownership in the banking sector to approximately 50 percent, up from 40 percent in 2010.  In the energy sector, foreign-owned company share of total revenue fell from 70 percent in 2010 to below 50 percent by the end of 2019. Foreign media ownership also has reduced drastically in recent years as GOH-friendly businesses have consolidated control of Hungary’s media environment. The number of media outlets owned by GOH-allies increased from around 30 in 2015 to nearly 500 in 2018.  In November 2018, the owners of 476 pro-GOH media outlets, comprising between 80 and 90 percent of all media, donated those outlets to the Central European Press and Media Foundation (KESMA) run by (ruling) Fidesz party insiders. PM Orban exempted KESMA from scrutiny by Hungary’s media and competition authorities.

As part of its pandemic response plan in March 2020, Parliament passed state of emergency (SOE) legislation that gave the GOH broad authority to bypass Parliament and govern by decree.  In June, Parliament repealed the SOE law and passed a new series of laws giving the government powers to act under an ongoing “state of healthcare crisis.”  These changes cover a wide range of political and economic interests, such as labor, property rights, and data protection.  The implementation of these laws continues to evolve and may have a significant impact on the investment climate in Hungary. As such, interested investors are encouraged to reach out to the points of contact listed in this report for the most up-to-date analysis of Hungary’s investment climate.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics