Country Risk Rating

A3
Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behavior. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average. - Source: Coface

Business Climate Rating

A3
The business environment is relatively good. Although not always available, corporate financial information is usually reliable. Debt collection and the institutional framework may have some shortcomings. Intercompany transactions may run into occasional difficulties in the otherwise secure environments rated A3.

Strengths

  • Diversified economy
  • High quality infrastructures thanks to European funds
  • Integrated within the European production chain
  • Trained workforce
  • Low corporate taxation
  • Generally positive payment behavior

Weaknesses

  • 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

Current Trends

Investment and Consumption Take a Lead on Growth

After switching to the new European Structural and Investment Fund’s plan in 2016, along with other CEE countries, Hungary obtained less funding from the EU, which led to a net deficit in investment. The situation began to improve in 2017, with a surge of fixed asset investments. Most of these were fuelled by a boost in EU co-financed projects, but other investments increased as well, including in manufacturing (e.g. automotive, IT equipment). Further capacity upgrades are expected.

On the consumer side, household spending continues to benefit from rising employment and higher wages. The unemployment rate dropped below 4% in 2017, and wages as a whole have benefitted from both increases of both minimum wage and guaranteed minimum wages for skilled workers. Wages are driven by a tight labor market: labor shortages have become a significant constraint for many companies, particularly regarding skilled employees, with skill mismatches on the labor market. An expected further tightening of the labor market will likely feed the ongoing rise of wages, at a rate that is likely to exceed both productivity and GDP growth. Despite this, the country continues to benefit from lower labor costs than Western Europe, helping it attract foreign investments. Rising wages have increased inflationary pressures and the central bank will likely become less accommodating.

The increased wage bill 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. Effective tax rates for large foreign multinationals in Hungary, especially German carmakers, had already been heavily reduced by subsidies and tax concessions. Small firms benefit from a lower tax rate of 10%. Exports are supported by favorable perspectives of the country’s main trade partners, and the high share of the automotive industry in terms of total exports is expected to strengthen, thanks to further improvements in manufacturing capacity.

Budget Deficit Widens on Further Spending

Despite being consolidated in the year to 2015, the general government deficit has increased, reaching 1.7% in 2016 and 2.0% in 2017. Although investment expenditures decreased and revenues benefited from increased wage-related tax receipts, government spending increased due to capital transfers and the public wage bill. Tax cuts and a further increase of expenditure, ahead of the April 2018 parliamentary elections, have increased the public deficit, which is expected to reach 2.4% of GDP in 2018. In the run-up to the elections, the government increased public spending, with rising public sector wages, increased infrastructure spending, and tighter border security to curb unauthorized immigration. The deficit level is subject to the inflow of funds from the EU, which are predominantly used to co-finance infrastructure building projects. Spending on investments could be reduced as a result of delays in implementation, therefore making the deficit lower than expected.

Viktor Orban and Fidesz: Four More Years

Prime Minister Viktor Orbán and his conservative Fidesz-Hungarian Civic Union (Fidesz) party were re-elected for a third four-year term in the April 2018 elections. After a strong nationalist anti-immigrant campaign in opposition to the EU on the dispersal of migrants, Fidesz obtained a landslide victory, with two-thirds of the seats in Parliament. The election was marked by an exceptionally high turnout: 68%, the highest since 1994. This absolute majority in Parliament will allow the government to push through key legislation without needing cross-party agreement and increase its control over state institutions. Some of the new legislations are likely to target NGOs supporting refugees, on which Viktor Orbán centered his criticisms during the campaign. A number of sectoral taxes, which were criticized by the European Commission for mainly targeting foreign-owned operators, are also expected to remain in place. These include an advertising tax on media, a retail tax, and a tax on energy sector entities if they do not invest in Hungary. In this context, relations with the European Commission will likely remain tense.

Source:

Coface (06/2018)
Hungary