Hungary: Risk Assessment
Country Risk Rating
Business Climate Rating
- Diversified economy
- High-quality infrastructure thanks to European funds
- Integrated within the European supply chain
- Trained workforce
- Low corporate taxation
- Generally positive payment behavior
- 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 corporate debt level (although decreasing)
Domestic demand will be the main growth driver
The economy’s recovery in 2022 will be driven mainly by domestic demand. Admittedly, growth will not be as strong as in 2021, when a strong base effect boosted figures after the sharp recession linked to the first waves of the pandemic, but it will remain brisk. Household consumption will benefit from fiscal stimulus measures and robust income gains from a tightening labor market. Regarding government measures, consumption will be boosted by income tax refunds to families with children, an income tax cut for workers under 25 years of age, and the re-introduction of the 13th monthly pension and administrative wage increases. Nevertheless, inflation will remain a constraint for a stronger acceleration of consumption, as consumer prices have exceeded the central bank’s inflation target (3%, ±1 percentage point tolerance band) since April 2021. It reached 7.4% in November as commodity and input price increases contributed to higher inflation. In 2022, it should accelerate further but will stay high. Companies are expected to pass higher inputs and wage costs on to consumers, while supply chain disruptions will likely continue to hamper their activity, at least in the first half of the year. The minimum wage was increased by 20% in January 2022 (affecting about 20% of all employees). Still, the reduction of employers’ social security contributions has dampened the impact on overall wage costs. To respond to inflationary pressures, the central bank began a tightening cycle in the early summer of 2021. Furthermore, the investment will be robust, thanks to the improving economic outlook, increasing capacity utilization, and policy support measures offering attractive financing and grants.
The budget balance has improved but is still in deficit
Despite a strong rebound in economic activity, which, in turn, will support robust revenue growth, the general government deficit is expected to stay high in 2022. After a still-expansionary 2021 budget, various measures will be continued, including temporary tax reductions for small local businesses, support for families and a further reduction in employers’ social security contributions, a service benefit for military and law enforcement employees, and a reduction in personal income tax for employees under the age of 25. Moreover, public investments will accelerate significantly. Public debt will be reduced, but it remains relatively high, especially compared to the regional Central and Eastern European average, which remains below 50% of GDP.
In 2022, the current account deficit will deteriorate, as export growth will be sensitive to supply chain disruptions. This is especially true for the automotive sector (about a third of manufacturing output and 20% of exports), which suffers severely from a shortage of semiconductors. Indeed, the global chip shortage has forced factories to reduce production. While Hungarian exports should accelerate in the second half of 2022 thanks to decreasing material shortages, strong domestic demand will trigger import growth, weighing on the trade deficit. In addition, a slow improvement in tourism (8% of GDP) will drag on the development of the services balance. The primary income deficit weighs on the current account balance due to the significant FDI income on equity.
Upcoming parliamentary elections
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 opposing the EU on the distribution of migrants, Fidesz obtained a landslide victory with two-thirds of the seats in Parliament. The absolute majority in Parliament allows the government to push through key legislation without needing cross-party agreements and to increase its control over state institutions. The next parliamentary election is scheduled for the spring of 2022. Six Hungarian opposition parties, including the Democratic Coalition, the Socialists, the liberals, and the formerly far-right and now center-right Jobbik, have united to defeat Fidesz and formed the United Opposition. Polls published in November 2021 indicated a close race with no sure winner.
Meanwhile, relations with the European Commission remain tense. In late 2020, Hungary (along with Poland) threatened to veto the European Union’s 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 poses the risk of losing tens of billions worth of EU funds.