Hungary: Risk Assessment
Country Risk Rating
Business Climate Rating
- Diversified economy
- High quality infrastructures thanks to European funds
- Integrated within the European production chain
- Trained workforce
- Low corporate taxation
- Generally positive payment behavior
- Aging population, low birth rate, and high emigration
- Regional disparities; lack of mobility
- Shortfalls in vocational education and training
- Poor levels of innovation and R&D
- Limited room for manoeuvre in terms of the budget
- High debt level of companies, although falling
- Fragility of the banking sector (public and private)
- Energy dependence: 50% of needs imported; 40% from Russia alone
Consumption and Investments Take a Lead on Growth
Hungary experienced a significant contraction of investments in 2016 when, similar to other CEE countries, the economy suffered from a lower absorption of EU funds due to switching to the new European budget. However, an improvement was already seen in the first half of 2017, with a surge of fixed asset investments. These were mostly fueled by a boost in EU co-financed projects, but other investments increased as well, including manufacturing industries (e.g. automotive, IT equipment). Further capacity upgrades are expected to be conducted.
On the consumer side, household spending continues to benefit from rising employment and higher wages. The unemployment rate dropped below 4% last year, and wages have increased, partly thanks to increases of both minimum wage and guaranteed minimum wages for skilled workers. The stimulus for wage rises comes from a tight labor market. Labor shortages have become an important constraint for many companies, particularly regarding skilled employees, with skill mismatches still present on the Hungarian labor market. An expected further tightening of labor market will trigger the ongoing rise of wages, and its pace is likely to exceed both productivity growth and Hungary’s GDP growth. Despite this, the country still benefits from lower labor costs levels than in Western Europe, and attracts foreign investments. Rising wages increase inflationary pressure and the central bank will likely become less expansive.
The increase of compensations is partly offset by the reduction of corporate tax to 9%: the lowest rate in Europe. This measure mainly benefits mid-sized Hungarian and foreign-owned companies with more than EUR 2 million in revenue. Tax rates for large foreign multinationals in Hungary, especially German carmakers, had been already heavily reduced by subsidies and tax concessions. Small firms already benefited from a lower tax rate of 10%. Exports benefit from favorable perspectives of main trade partners, and the high share of the automotive industry in total exports is expected to strengthen, thanks to further improvements in manufacturing capacities.
Budget Deficit Widens on Further Spending
The budget has been consolidated over last years. However, since 2015, the general government deficit increased, reaching 1.8% in 2016. On the one hand, investment expenditures decreased and revenues benefited from growth of wage-related tax receipts, but on the other, government spending increased due to capital transfers and the public wage bill. Tax cuts and a further increase of expenditures, as elections approach, made the public deficit higher: it is expected to reach 2.4% of GDP in 2017 and then 2.5% of GDP in 2018. The deficit level is subject to the pace of inflow of funds from the EU, predominantly used for infrastructure building projects and other programs. Spending on investments could be reduced as a result of delays in implementation, therefore making the deficit lower than expected. Elections scheduled for April 2018 contribute to a higher generosity of government with rising public sector wages, increased spending on infrastructure, and expenditure on tighter border security to curb unauthorized immigration.
Fidesz is Expected to Win the Next Parliamentary Election
Prime Minister Viktor Orbán and his conservative Fidesz-Hungarian Civic Union (Fidesz) party were re-elected for a second four-year term in the 2014 elections. Facing competition from the far right Jobbik party, in third place behind the Socialist party, Fidesz maintains a nationalist policy that includes opposition to the European Union on the dispersal of migrants. The government implemented a number of sectorial taxes, which are expected to remain in place. Fidesz has led in the latest public opinion polls (October 2017), bolstering the party’s position as the favorite to win the next parliamentary election, due in April 2018. Therefore, it is most likely that Fidesz will be elected for a third consecutive four-year term. The party has been targeting its core voter base with a fresh anti-immigrant campaign. The outlook for Fidesz has improved further with the decision of Laszlo Botka – the prime ministerial candidate of the main center-left opposition force, the Hungarian Socialist Party (MSZP) – to withdraw his candidacy in October 2017. Jobbik remains a distant second in terms of popularity.