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
- Ageing population, low birth rate
- Regional disparities; lack of mobility
- Deficiencies in vocational education
- Poor levels of innovation and R&D
- Limited room for maneuver in terms of budget
- High debt level of companies (although falling)
- Fragility of the banking sector (public and private)
Investment and consumption drive growth
Growth is expected to slow slightly in 2019 after solid expansion in both 2017 and 2018. Domestic demand remains the main driving force of the economy, household consumption increasing as a result of rising employment and wage growth (including significant wage increases in the public sector). The unemployment rate reached 3.8% in August 2018 – one of the lowest levels in the EU and well below its average of 6.7%. A further slight decrease of unemployment is expected, although a lack of available labor will reduce employment growth. Labor shortages have become a significant obstacle for companies, limiting their capacity to expand and driving wages higher. Despite the good situation on the labor market perceived by households, private consumption will accelerate at a slower rate, as the large public sector wage increase will fade out and a further increase is unlikely.
Economic growth has also benefited from rebounding investments, thanks notably to a surge in public projects. Facing high capacity utilization, the private sector will likely be willing to conduct investments. Within this regard, the FDI inflow and EU structural funds are strong drivers of investment. On the other hand, SME investments are rather lackluster, in large part due to labor shortages and the uncertainty of continuing solid demand.
Since 2017, companies in Hungary have benefited from a 9% corporate tax rate – the lowest in Europe. This measure mainly covers mid-sized Hungarian and foreign-owned companies with more than €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. Hungary’s main exports are machinery products, vehicles and pharmaceuticals. Exports are supported by the weakening yet still relatively favorable perspectives of the country’s main trade partners, and the large share of the automotive industry in total exports is expected to strengthen thanks to further improvements in manufacturing capacity and new investments.
Budget deficit expected to drop
The general government deficit increased in 2018 as a result of tax cuts and a further increase of expenditure ahead of the April 2018 parliamentary elections. The reduction in the employers' social contribution rate mitigated the impact of growing wages for companies. In 2019, the budget will not be burdened by further expenditure growth and the deficit is expected to decrease. Its level is subject to the inflow of funds from the EU, which are predominantly used to co-finance infrastructure building projects. Spending on such investments could be reduced due to both delays in implementation and construction capacity constraints. Nevertheless, the final level could also go higher if the implementation is extremely efficient.
Hungary’s current account surplus reached 2.9% of GDP at the end of 2017. It has been used to increase both foreign currency reserves and investments abroad.
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 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 allows the government to push through key legislation without needing cross-party agreement, and increases its control over state institutions. A number of sectorial taxes, which were criticized by the European Commission for mainly targeting foreign-owned operators, are likely 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. Moreover, the European Parliament had already voted in September 2018 to initiate disciplinary action against Hungary over alleged breaches of the EU's core values, including the rule of law, freedom of the media and NGOs, and an insufficient fight again corruption. The suspension of Hungary’s voting rights would be the next punitive measure, but this is highly unlikely as it requires a unanimous decision from the European Council.