Hungary special report 2015: Untapped economic potential

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Foreign investors are starting to appreciate the opportunities available in an economy that has turned itself around.

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Heinrich Pecina leans back in a chair at the Gresham Palace hotel in Budapest and scratches his head. A senior partner at Vienna Capital Partners (VCP), a leading Austrian private equity player, he’s confused by the sometimes unreceptive attitude to Hungary adopted by the outside world. An influential and prominent investor (VCP’s acquisition of the local media operations of German publishing giant Axel Springer was approved in October 2014, the latest in a long line of successful deals), he is baffled at Hungary’s image among some – though not all - foreign investors and commentators. 

"The country’s economic development story is there, though it isn’t always recognized outside the region, or outside Europe," Pecina says, warming to his theme. "Hungary boasts a reliable workforce, and low labour and production costs. It’s in the Schengen region, meaning ease of travel around Europe. Real estate prices are rising again, showing that the property market may have bottomed out, and confidence has returned. There is so much untapped potential here."

There is much in what he says. Hungary was on its uppers in 2009, fast running out of cash and on the verge of calling in the bailout team at the International Monetary Fund. It never quite came to that, though those were distressing days, admits Gyula Pleschinger, a member of the Monetary Council of the Central Bank of Hungary (MNB). "The country was in a very dark place," he says. "In fact, it was pretty much the worst-performing economy in the region." Hungary muddled through, but by 2010 a newly installed government, headed by premier Viktor Orbán, knew that structural reforms were needed to get the economy back on track. 

Making it better

To many, the decisions made in the immediate aftermath of those elections were the making – or rather the re-making – of Hungary. New taxes to plug a yawning hole in public finances were imposed on sectors including financial services, telecommunications, utilities and natural resources. Orbán and his council of ministers offset that pain by introducing a series of unorthodox but ultimately successful and business-friendly reforms. 

Pecina VCP
Heinrich Pecina,
Vienna Capital Partners

The government, notes Pecina, was probably the only one in Europe to react to the financial crisis by slashing income tax, creating a new flat rate of 16%. "Income taxes went up across Europe in the wake of the events of late 2008, but not here," he says. Corporate tax in Hungary stood at 19% at end-2014, according to data from KPMG, on a par with Poland and the Czech Republic, the region’s two other leading economies, but below the levels in Austria (25%) or Germany (29.58%). 

The aim, in the wake of the 2010 elections, was to boost growth and consumption and cut debt at the personal, corporate and national levels, even while creating a wealth of new jobs – no small feat given the depths to which Hungary, over-leveraged and rudderless, had sunk. Given that some European nations have struggled, in the post-crisis era, to meet a single one of those criteria, Hungary’s ensuing success story is nothing short of miraculous.

Unemployment, which last peaked at 12% in late 2012, stood at 7.3% at end-September 2014, according to data from Eurostat, far below Poland (8.5%) and Slovakia (13%). Péter Virovácz, head of the macroeconomic department at Századvég Economic Research Institute, a Budapest-based think-tank, reckons that 400,000 jobs have been created in the private sector since the financial crisis, many in the resurgent manufacturing sector. 

Financial policy minister Gábor Orbán told Euromoney that the key to job creation has been lower taxes, a higher annualized investment rate – which hit 15% in 2014 – and incentives to create new vacancies. "In recent years, we have made every effort to increase labour force participation," the minister says, notably by slashing corporate taxes while cutting welfare benefits. That made it financially viable for companies to hire - and for individuals to work, rather than living off the state. 

Government debt as a share of gross domestic product (GDP) has also fallen sharply, to 2.4% by end-September, against 4% in Poland, while consumption is tipped by Virovácz to surge in 2015 thanks, he says, to "higher disposable income due to higher wages, rising employment, and consumer-price deflation". Two further boosts are likely to come from bank refunds, following a late-2014 government ruling on pre-crisis loans issued in foreign currencies, and a fresh influx of development finance from the European Union. 

Other factors point to a country with a bright future. Hungary rose three places year on year in the World Bank’s 2015 Doing Business report, to 54th place, ahead of both Poland (85th) and the Czech Republic (110th). It takes just five days to start a business, beating Poland by nearly a month. Hungary also boasts the highest level of labour market flexibility in Central and Eastern Europe (CEE), according to the Organisation for Economic Cooperation and Development. It ranked 20th in the 2015 World Bank report in terms of enforcing contracts – outstripping its CEE peers and on a par with nations in Western Europe and North America.