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Hungary special report 2015: EU funding targets infrastructure

Hungary is set to receive $29 billion in EU funding for development over the next seven years.

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The European Union often struggles for positive coverage in the media, thanks to burdensome regulations and the inflated salaries of an army of mandarins. But it gets some things right. Consider the funds handed to developing countries and provinces by legislators in an attempt to create a more equitable spread of wealth and capital across the region. 

Hungary is a classic example. EU funds, sourced from member states, are helping to boost further the business and investment credentials of a country already enjoying a substantial economic revival. Over the seven years to end-2020, €24.5 billion ($29 billion) in fresh capital will be transferred to Budapest from Brussels. 

Much of this will be pumped directly into improving the country’s already impressive infrastructure links, particularly in the east and north. Just shy of €2.7 billion will be channelled into improving highways, rail links and urban transport networks, with €400 million earmarked for improving the often patchy broadband network. A further €2 billion is tagged for less visible but no less vital benefits such as improving energy efficiency and wastewater management. 

Between 2014 and 2020, €7.73 billion in European funds will be directed into improving economic development and innovation – a broad-based category ranging from research and development and financial instruments to information technology and small- and medium-sized enterprises (SMEs). A further €3.4 billion will help to improve urban development, with just shy of €3 billion to be used for building special investment zones and improving economic conditions in rural areas. These new funding sources will directly benefit Hungary’s economy, as well as the army of local corporates and global multinationals that profit from its status as a regional industrial powerhouse in the making, capable of emulating the manufacturing capabilities of the likes of Austria or Germany. 

Hungary has in recent years become an increasingly compelling investment destination for global multinationals. Its economic turnaround helps ensure that top students from the country’s many world-class engineering, technical and economics colleges remain at home after graduation, to search for jobs and opportunities. Past generations would have looked for careers and higher salaries in the US, UK or Germany, for example. 

A great place to invest

It’s easy to overlook how important the new EU capital is to Hungary’s future. With Budapest set to match, euro for euro, the capital being extended by Brussels over the next seven years, this is set to be a great place to invest. If all goes well, by 2020 Hungary should be a strong and balanced economy with a high and sustainable growth rate, supported by a sturdy manufacturing base and a burgeoning services sector.

Zoltán Polyánszksy, a senior analyst at domestic economic and financial consultancy Századvég Economic Research Institute, notes that a sizeable chunk of the new funds will be channelled into boosting research and design investment, enhancing the competitiveness of local SMEs (in part by helping to direct more bank lending to fast-growing smaller-cap corporates) and fostering job creation. The government, Polyánszksy notes, “is aiming to channel the majority of EU funds over the next seven years into sectors that enhance sustainable development”, with the aim of creating a strong business environment implicitly trusted by local and foreign investors and corporates. 

EU funds don’t just help to create a more equitable economy and society; they also create new lending opportunities for the financial services sector. László Bencsik, chief financial and strategic officer at OTP Bank, points to a direct correlation between the fresh round of European funding and rising corporate lending. “A larger proportion of these funds … will go into commercial development and lending,” he says. “This will prove to be a fundamental engine of Hungarian growth over the next seven years.” Péter Virovácz, head of the macroeconomic department at Századvég, believes previous rounds of EU funding were key to the country’s ongoing economic revival.

There are many reasons for investing in any country, of course. EU funds alone will not draw in the global multinationals, from Samsung to General Electric and Audi to Microsoft, that have made Hungary their home in Central and Eastern Europe – but they certainly act as an added incentive. 

Companies invest primarily because they believe in a sovereign growth story – and, as economists note, you will be hard-pressed to find a country with more long-term potential anywhere in the region. Századvég’s Polyánszksy points to a cluster of key reasons to invest in Hungary right now, from a beneficial geographic location and an excellent education system to a low rate of corporate and income tax and the government’s clear commitment to manufacturing, in the form of tax relief and subsidies. Viewed from any angle, Hungary’s future looks bright and clear.

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