Hungary: Risk Assessment
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.|
Business Climate Rating
|A2||The business environment is good. When available, corporate financial information is reliable. Debt collection is reasonably efficient. Institutions generally perform efficiently. Intercompany transactions usually run smoothly in the relatively stable environment rated A2.|
- Trade surplus
- Good infrastructures
- Diversified economy
- Skilled workforce
- Inclusion in the European production chain
- Good payment behavior
- Aging population and low participation rate to active population
- Education and training gaps
- Little room for maneuver on budget
- High external debt and exposure to exchange rate risk
- Weak banking sector
- Energy dependency: 50% of needs imported, 40% from Russia alone
- Insufficient innovation and R&D
- Drift towards authoritarianism and interventionism
- Poor targeting of social policy
Activity sustained by private consumption
Growth is expected to significantly decrease in 2016. This fall is linked to the expected decline in public investment due to the fact that we are between two campaigns of European funding. This temporary decline in EU structural funding will also weigh on private investment, although SMEs (a vital component of the economy) will benefit, for the last year, from the Funding for Growth Scheme, which consists in making loans worth up to about 2% of GDP available at a maximum interest rate of 2.5%. At the same time, a new funding for growth scheme (FGS+) will take over to encourage the banks to lend to SMEs at market based rates by offering them various advantages, in particular a cut in the tax on their assets from 0.53 to 0.31% and partial management of interest rate risk. Household consumption should be the major contributor to growth. Employment should continue to grow, thanks, in particular, to increased hiring under the public employment scheme to which all the unemployed are required to belong in order to receive welfare benefits. Agriculture and public services are the major employers of this cheap workforce. Households will benefit from the cut in the flat income tax rate from 16% to 15%, higher welfare benefits and the lowering of VAT on certain products (new housing, pork products). Moreover, average wages should continue to increase more rapidly than prices, which should rise moderately. Because of Hungarian industry’s close involvement in the European production chain and of a recovery in demand, exports should remain dynamic. Sales of vehicles and automotive parts (5% of GDP) could, in addition, continue their progression.
Stabilization of public deficit at a moderate level, but still high debt
Despite the cost of converting household loans from the Swiss franc to the forint (less than 1% of GDP) and income tax cuts, the public accounts are expected to report a stable deficit of 2% in 2016. The State is relying on an increase in VAT income thanks to remote monitoring of cash registers and intends to privatize a large portion of the agricultural land it owns. The accumulation of previous budget deficits left a significant debt burden (75% of GDP at the end of 2015), but whose weight should start to ease. A third of the debt (against 50% end-2011) is denominated in euros and the share held by non-residents fell to 50%, because of incentives from the central bank to commercial banks and households to invest in forint-denominated Treasuries.
Comfortable trade surplus, but foreign investors are cautious
The current account surplus is expected to increase in 2016, helped by the recovery in Europe and still moderate energy bill. Thanks to vehicles and automotive parts, household electronics, household appliances, agrifood, medicines, medical devices, services to businesses and households (medical services, tourism), trade in goods and services has been reporting increased surpluses since 2009. Together with European funding and expatriate remittances, these surpluses make it possible to deal with the repatriation of income by foreign investors and investments by Hungarian households abroad. New foreign direct investments are no longer expected to decline and will post modest growth. The favorite sectors for FDIs, such as automotive, electronics and pharmaceuticals have mostly been spared from State interventionism. By contrast, telecommunications, energy, banking and media remain under pressure from the State, which has taken steps (taxes, price impositions) in respect of large companies, generally foreign, which reduce their profitability and encourage them to disinvest in favor of public, as well as private Hungarian actors. Meanwhile, the external debt burden (excluding debt linked to FDIs) is declining (75% at end 2015 compared with 115% of GDP end 2011), mainly as a result of deleveraging by banks and businesses. The percentage held by the State and the central bank (58% of the total) is stable.
Prime Minister Viktor Orban maintains his nationalist and interventionist positioning
Viktor Orban and the Fidesz, a nationalist, center right party, in partnership with the Christian Democratic People's Party were re-elected to govern in April 2014. Faced with electoral competition from Jobbik, an extreme right-wing party, which caused him to lose his two-thirds majority (needed to amend the constitution) during a by-election, Viktor Orban stressed his nationalist discourse, in particular towards refugees. This has maintained tensions with his European partners, already sharpened by Hungary's understanding attitude towards Russia over Ukraine and the institutional reforms which have hemmed in the mechanisms of checks and balances and freedoms. Despite State interventionism and a number of corruption scandals, the business climate remains satisfactory, worse than in Poland and Slovakia, but much better than in Romania and Bulgaria. The overall payment behavior is good.