Country Risk Rating

A4
A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still 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 infrastructure thanks to European funds
  • Integrated within the European production chain
  • Trained workforce
  • Low corporate taxation
  • Generally positive payment behavior
  • Generally positive payment behavior

 

Weaknesses

  • Ageing population, low birth rate
  • Open economy exposed to European economic trends
  • Regional disparities; lack of mobility
  • Deficiencies in vocational education
  • Poor levels of innovation and R&D, high content of imported inputs in exports
  • High debt level of companies (although decreasing)

Current Trends

Gradual recovery

The Hungarian economy is expected to return to solid growth rates in 2021, following the strong contraction recorded last year due to the pandemic. Both the first and second waves of COVID-19 took a toll on economic activity in the second and fourth quarters of 2020. The recovery in 2021 will be gradual, once the health situation improves and restrictions are eased. Household consumption is expected to rebound thanks to higher disposable income and increased consumer sentiment. Support measures for households have been less generous than in most other European countries, with limited unemployment benefits and a short-time work scheme. The main tool of crisis management was a moratorium on credit repayment for both households and businesses. Despite less stringent measures, the Hungarian economy was affected by the pandemic due to its high openness, strong dependence on the automotive industry, as well as constrained tourism and transport sectors. The revival of global trade and improving perspectives for the automotive sector will support the recovery of the Hungarian economy this year. Hungary has been endowed with production plants of Audi, BMW, and Mercedes. Nevertheless, companies’ investments are likely to remain subdued as the capacity utilization decreased during the pandemic, and companies will be more willing to use spare capacities rather than deciding to invest, especially if the high level of uncertainty remains. On the other hand, the government is likely to encourage companies to invest by offering attractive financing and grants.

The budget balance has improved but is still in deficit

After its sizeable widening due to the COVID-19 crisis, the budget deficit is expected to narrow in 2021. Measures taken to soften the impact of the pandemic on the Hungarian economy are likely to expire this year and, therefore, will not burden public finances as much as they did in 2020. These included tax cuts in the most affected sectors and a general cut of employers’ social contributions. Moreover, revenues were affected by lower proceeds due to the economic deterioration. In 2021, public finances should benefit from an economic recovery, with growing consumption and the improvement of the labor market, while higher excise duties on tobacco will also drive increases in tax revenues.

The current account deficit is expected to recede this year following a slump in exports that exceeded a decrease in imports in 2020. The lockdown and a drop in international demand affected the Hungarian manufacturing sector, especially the automotive sector, which accounts for about a third of manufacturing output and 20% of exports. Within services, trade, transports, and tourism suffered a lot from the pandemic. In 2021, Hungarian exports should benefit from their competitiveness, better trade perspectives, and improving automotive demand. Nevertheless, a slow improvement of tourism services (8% of GDP) will make it impossible to record a current account surplus this year.

Fidesz remains in power

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 nationalist anti-immigrant campaign, in opposition with the EU on the distribution 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 allows the government to push through key legislation without needing cross-party agreements and increases its control over state institutions. The next parliamentary elections are scheduled for 2022.

In this context, relations with the European Commission have remained tense. In late 2020, Hungary (along with Poland) threatened to veto the European Union’s EUR 1.8 trillion long-term budget and pandemic recovery fund, rejecting any attempts to link the rule of law to gain proceeds from the fund. Both countries have been under EU investigations for undermining the independence of courts, media, and non-governmental organizations, which therefore poses the risk of losing tens of billions in EU funds.

Source:

Coface (02/2021)
Hungary