Successfully investing in Hungary

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last updated on 27 May 2020 | reading time approx. 5 minutes

 

 

 

How do you assess the current economic situation in Hungary?

Hungary's economy has continued to grow strongly in 2019. The GDP growth in the 4th quarter of 2019 was 4.5 per cent compared to the same quarter of the previous year (seasonally and calendar-adjusted). For the whole year, however, there was a slight decline compared to the previous year – compared to 5.1 per cent in 2018 it is now 4.9 per cent. Even so, the record growth from 2018 was only slightly missed. According to forecasts from last autumn, a GDP growth of 3.3 per cent was projected for 2020 and 2.9 per cent for 2021. As a result of the corona pandemic, these growth forecasts had to be drastically reduced in the meantime. For Hungary, a shrinking economy with a GDP decline of -3.0 per cent is expected for 2020 at the moment. Then in 2021, a 4.2 per cent growth in GDP could be achieved again. The unemployment rate, which was (only) 3.4 per cent before the corona crisis, might increase to 5 or 6 per cent in 2020, and the revival of the economy projected for 2021 is expected to bring the unemployment rate down to 4.0 per cent. The healthy economic situation over the past few years, the increased real income of households and the measures to promote home ownership as well as the subsidised infrastructure projects have increased domestic demand in recent years. However, the effects of the current corona crisis can already be felt.

 

How would you describe the investment climate in Hungary? Which sectors offer the largest potential?

The investment climate in Hungary has remained good, especially in the manufacturing, services and construction sectors. These sectors continue to be considered the main growth drivers. Further investment incentives were created by reducing the corporate tax rate to only 9 per cent in 2017 and decreasing the burden on employers in the form of a further reduction in employers’ social security contributions from 17.5 to 15.5 per cent from mid-2020. Large-scale projects and investments in future technologies are also currently favoured by the government.

 

In addition to the favourable tax regime, the legal framework is also stable and provides a reliable basis for doing business in the country. The regulations of the Hungarian company law and the Civil Code are comparable to the German regulations. The Hungarian labour law allows for a high degree of flexibility in terms of working hours and wages and can be described as overall employer-friendly. The fact that the government intends – particularly in the industry – to redesign the labour law framework more in favour of employers has recently been shown by the regulation passed in April 2020 to extend flexible working time unilaterally determinable by the employer from 4 months to 24 months.

  

The automotive industry still holds great potential. In addition to the manufacturers Audi, Mercedes-Benz, Opel and Suzuki, many part suppliers have also settled in Hungary. From Bosch to Knorr-Bremse to Zollner, all the well-known firms are represented, but many medium-sized companies have also settled in Hungary in the past 25 years. As a result of the corona crisis, large projects in the automotive sector, such as the construction of the so-called “second automobile plant” in the city of Kecskemét by Mercedes-Benz, or the construction of BMW's production facility in the city of Debrecen, have been postponed by one to two years. However, the demand for possible locations within Hungary continues to be high. Dual training based on the German model has been pursued for years and is now used by many companies. Many companies have also relocated significant parts of their research and development facilities, IT and SSC staff positions to Hungary, which also indicates e.g. the availability of appropriate specialists.

 

Due to the current crisis, Hungary's strong focus on the automobile and automotive industries has led to a decline in the number of orders as well as to underemployment in many sectors. In order to avoid a wave of layoffs of employees, a regulation was introduced based on the German model for the introduction of short-time subsidies, which in reality can hardly be compared to the German model.

 

What challenges do German companies face during their business ventures into Hungary?

For some years now, many companies in certain regions of the country have had difficulties recruiting suitable skilled workers and retaining them in the long term. Especially in regions close to the borders with Austria and Slovakia, many people work in the neighbouring country because of the higher wages while others have even moved to other EU countries. This is aggravated by the new industrial projects that can definitely entice employees. Thus, the search for personnel as well as retaining them can prove to be a challenge that should not be underestimated.
 
Investors should always be aware – especially in the current corona crisis – that despite the government's generally positive attitude towards investment projects and despite the generally favourable conditions, adverse measures such as special taxes on certain sectors are also very likely. In any case, past experience shows that the government sometimes tends to favour local companies and institutions in certain areas.

 

What role does selecting a location play for foreign investors in Hungary?

In addition to factors such as availability of specialists and good transport links, public incentives also play a certain role in the selection of new locations. When choosing a location, a few kilometres can determine the eligibility for subsidies. While hardly any funding is granted in the greater Budapest area, there are often good opportunities in structurally weaker regions to receive purely Hungarian or EU subsidies. In terms of subsidies, there is a clear west-east divide with the highly developed Western Hungary and the Budapest capital region on the one hand and the rather structurally weak Eastern Hungary on the other. Investors who are located in favoured industrial zones are often also entitled to local tax reductions. Therefore, discussions on possible locations should be initiated with the communities in good time.

 

In your opinion, how will Hungary develop?

Germany has always been Hungary's most important trading partner. Of the total of 109 billion Euro in exports, around 31 billion Euro went to Germany in 2019 alone. The value of total exports in 2019 rose by 4.0 per cent compared to the previous year.

 

The driving forces of economic growth are investments and private consumption. Both areas are supported by the government; industrial investments are supported through various types of subsidies and private consumption is boosted by home purchase subsidies and other benefits – especially to young families.

There is a stable base of foreign direct investment already in the country, and other well-known companies such as BMW and some battery manufacturers are in the process of setting up production facilities in Hungary, which in turn will be followed by further investment projects. The country’s proximity to Germany, the good infrastructure, the low wage level and the consistently good level of training certainly speak for Hungary as a potential investment location. The trend that Asian companies are increasingly opting for new locations in Europe is also noticeable in Hungary and is still continuing. Based on current experience, lots of companies are striving to reduce their dependency on the Asian region and move their operations back to Europe. Hungary will also certainly benefit from this.

 

The standard of living in Hungary will continue to improve in general which will also be accompanied by rising wages. Unfortunately, the development will slow down somewhat due to the current global crisis situation – but we continue to expect good opportunities and possibilities for our region.

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