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Hungary: Market Profile

Picture: Hungary factsheet
Picture: Hungary factsheet

1. Overview

Since transitioning from a centrally planned to a market economy, Hungary has made significant economic progress. Investment and private consumption are now among the key drivers of growth supported by the recovery of credit to the private sector, while the brightening outlook in the global and European Union economies is lending strong support to Hungary's trade.

Source: Fitch Solutions
Date last reviewed: August 16, 2018

2. Major Economic/Political Events and Upcoming Elections

April 2018
Prime Minister, Viktor Orban, was re-elected for a fourth term; his Fidesz party won a supermajority in the national assembly.

Source: BBC country profile - Timeline
Date last reviewed: August 16, 2018

3. Major Economic Indicators

Graph: Hungary real GDP, Hungary inflation
Graph: Hungary real GDP, Hungary inflation
Graph: Hungary GDP by sector (2017)
Graph: Hungary GDP by sector (2017)
Graph: Hungary unemployment rate
Graph: Hungary unemployment rate
Graph: Hungary current account balance
Graph: Hungary current account balance

e = estimate, f = forecast
Source: International Monetary Fund, World Bank, Fitch Solutions

4. External Trade

4.1 Merchandise Trade

Graph: Hungary merchandise trade
Graph: Hungary merchandise trade

Source: WTO
Date last reviewed: August 6, 2018

Graph: Hungary major export commodities to Hong Kong (2017)
Graph: Hungary major export commodities to Hong Kong (2017)
Graph: Hungary major export markets (2017)
Graph: Hungary major export markets (2017)
Graph: Hungary major import commodities (2017)
Graph: Hungary major import commodities (2017)
Graph: Hungary major import markets (2017)
Graph: Hungary major import markets (2017)

Source: Trade Map, Fitch Solutions
Date last reviewed: August 15, 2018

4.2 Trade in Services

Graph: Hungary trade in services
Graph: Hungary trade in services

e = estimate
Source: WTO
Date last reviewed: August 6, 2018

5. Trade Policies

  • Hungary has been a member of the WTO since January 1, 1995 and has been a member state of the European Union since May 1, 2004.
  • Hungary's main trade partners are in the EU and the absence of customs charges supports large volumes of trade. Hungary applies the EU's Common External Tariff (CET), which means goods manufactured and imported from within the EU are not subject to customs charges. The average tariff rate for EU states is just 1%, which is among the lowest globally, although goods imported from outside the EU will incur duties of between 0-17%. Most of the country's major trade partners are within the EU, hence risks are less pronounced, such that Hungary's average tariff rate stands at 1.5%.
  • In December 2016, EU states agreed on a proposal to modernise the EU's trade defence instruments, with a view to shielding EU producers from damage caused by unfair competition. The proposed regulation amends current anti-dumping and anti-subsidies regulations to better respond to unfair trade practices, and furnishes Europe's trade defence instruments with more transparency, quicker procedures and more effective enforcement. In exceptional cases, such as in the presence of distortions in the cost of raw materials, it will enable the EU to impose higher duties through the limited suspension of the lesser duty rule. This will provide some protection to Hungary's secondary and tertiary sectors.
  • In March 2016, the EC announced a new support package for European farmers, which involves mobilising an estimated EUR500 million within the next two years. The intervention ceilings for dairy products have been nearly doubled. This will limit the ability of foreign businesses to export products such as milk, fruits and vegetable farmers to Hungary.
  • In 2016, the EC introduced an import licensing regime for steel products exceeding 2.5 tonnes. The regulation will be active until May 15, 2020. In Q215 the EC issued regulations on trade restrictions on cattle, beef, watermelons and prepared tomatoes with Turkey. This will help to protect domestic agriculture and regional farming businesses.

Source: WTO - Trade Policy Review, Global Trade Alert, Fitch Solutions
Date last reviewed: August 16, 2018

6. Trade Agreements

6.1 Trade Updates

The European Union (EU), Australia's second largest trade partner, has launched negotiations for a comprehensive trade agreement with Australia. Bilateral trade in goods between the two partners has risen steadily in recent years, reaching almost EUR48 billion in 2017, while bilateral trade in services added an additional EUR27 billion. The negotiations aim at removing trade barriers, streamlining standards and putting European companies exporting to or doing business in Australia on an equal footing with those from countries that have signed up to the Trans-Pacific Partnership or other trade agreements with Australia. The Council of the EU authorised opening negotiations for a trade agreement between the EU and Australia on May 22, 2018.

6.2 Multinational Trade Agreements

Active

  1. Hungary is a member of the European Union effective from May 1, 2004, adopting the EU’s common external trade policy and measures.

  2. EU is a political and economic union of 28 member states that are located primarily in Europe. As an EU member Hungary applies the EU Common External Tariff and enjoys tariff-free trade within the EU. Within the Schengen Area, passport controls have been abolished. A monetary union was established in 1999 and came into full force in 2002, and is composed of 19 EU member states which use the euro currency; however, Hungary maintains its own currency.

  3. The Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada will be provisionally applied as of September 21, 2017, having been signed in October 2016. The agreement is expected to boost trade between partners as CETA removes all tariffs on industrial products traded between the EU and Canada. CETA also opens up government procurement. Canadian companies will be able to bid on opportunities at all levels of the EU government procurement market and vice-versa, though some sectors are restricted. The agreement will only enter into force fully and definitively when all EU Member States have ratified the Agreement.

  4. Europe Free Trade Association (EFTA) includes Switzerland, Norway, Liechtenstein, and Iceland. The European Economic Area (EEA) unites the EU Member States and the three EEA EFTA States (Iceland, Liechtenstein, and Norway) into an Internal Market governed by the same basic rules. These rules aim to enable goods, services, capital, and persons to move freely about the EEA in an open and competitive environment, a concept referred to as the four freedoms. The Agreement on the European Economic Area, which entered into force on January 1, 1994, brings together the EU Member States and the three EEA EFTA states, referred to as the Internal Market.

Signed, Awaiting Ratification

EU-Japan Trade Agreement: In July 2018, EU and Japan signed a trade deal that promises to eliminate 99% of tariffs that cost businesses in the EU and Japan nearly EUR1 billion annually. According to the European Commission, the EU-Japan Economic Partnership Agreement (EPA) will create a trade zone covering 600 million people and nearly a third of global GDP. The result of four years of negotiation, the EPA was finalised in late 2017 and is expected to come into force by the end of the current mandate of the European Commission in 2019. The total trade volume of goods and services between the EU and Japan is EUR86 billion. The key parts of the agreement will cut duties on a wide range of agricultural products and it seeks to open up services markets, in particular financial services, e-commerce, telecommunications and transport. As of August 2018, the agreement is awaiting ratification by the European Parliament and the Japanese Diet following which it could enter into force in 2019. At the same time, negotiations with Japan continue on investment protection standards and investment protection dispute resolution.

Source: WTO Regional Trade Agreements database, Fitch Solutions
Date last reviewed: August 16, 2018

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Hungary FDI stock
Graph: Hungary FDI stock
Graph: Hungary FDI flow
Graph: Hungary FDI flow

Source: UNCTAD
Date last reviewed: August 6, 2018

7.2 Foreign Direct Investment Policy

  1. Hungary's accession to the EU was accompanied by the tightening of legal protection for foreign investment and the government has attempted to guide capital inflows towards targeted sectors such as manufacturing facilities, research and development, IT, automobiles and tourism. The property rights of foreign investors are also guaranteed against expropriation or nationalisation, except in cases of national security, in which the private owner is entitled to fair compensation.

  2. There are no legal restrictions on foreign ownership in any sector, and under the Foreign Investment Act of 1988, international companies are guaranteed equal treatment alongside Hungarian businesses, with full freedom with regard to repatriation of profits.

  3. Currently, foreign firms control 66% of the manufacturing sector, 90% of the telecommunications sector, and 35% of the energy sector. The private sector currently produces about 80% of Hungary’s economic output. Foreign investors interested in financial institutions and insurance companies must officially notify the government of their intentions, but do not need advance authorisation.

  4. Under the Investment Act, companies incorporated in Hungary are permitted to purchase and own real estate to support their economic activities. Nevertheless, only private Hungarian or EU citizens resident in Hungary with a minimum of three years of experience working in agriculture or holding degree in an agricultural discipline can purchase farmland, according to the 2014 Land Law. All others may only lease farmland.

  5. The Hungarian government regulates the prices of certain goods, setting upper and lower limits to which the private sector must adhere. Price-regulated sectors include energy and pharmaceuticals, and companies operating in these fields have suffered losses in cases where the government has been too slow to adjust upper limits or failed to meet subsidy obligations, as in the case of medicinal goods and electricity.

  6. The Hungarian government has publicly declared that reducing foreign bank market share in the Hungarian financial sector and tightening regulations governing NGOs are key priority areas. Accordingly, several state-led initiatives over the past several years targeted the banking sector and reduced foreign participation.

  7. Regulations in 2015 obligated banks to retroactively compensate borrowers for interest rate increases on certain consumer loans. Increasing entry barriers in certain sectors could have undermined previous sunk-cost investments, contributing to a general sense of policy-induced uncertainty regarding the protection of intangible assets.

  8. Performance requirements, such as job creation or investment minimums, can be imposed as a condition for establishing, maintaining, or expanding an investment. Hungary's rules and regulations regarding labour mobility are broadly in line with EU directives. Most non-EU citizens require a work visa and permit in order to go and work in Hungary, which generally takes about a month to obtain. Indeed, there is large amount of bureaucracy that businesses must contend with when trying to bring in foreign workers from non-EU states.

Sources: WTO - Trade Policy Review, the International Trade Administration (ITA), US Department of Commerce
Date last reviewed: August 16, 2018

7.3 Free Trade Zones And Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
As part of the country’s EU accession, Hungary eliminated foreign trade zones. Though the Ministry of National Economy had plans to nominate customs free zones, there currently seems to be little demand. Nevertheless, Hungary offers a well-developed incentive system for investors, which is anchored by a special incentive package for investments over a certain value, which is typically over USD11 million. Administered by the Hungarian Investment Promotion Agency (HIPA) and managed by the Ministry of National Development (MND), the incentive system is compliant with EU regulations on competition and state aid.Investors who establish manufacturing facilities, logistics facilities, regional service centres, R&D facilities, bioenergy facilities, or those who make tourism industry investments in any area stand to benefit from the incentive packages which may consist of cash subsidies, development tax allowances, training subsidies, and job creation subsidies.

Source: Hungarian Government websites, Fitch Solutions
Date last reviewed: August 16, 2018

8. Taxation – 2018

  • Value added tax: 27%
  • Corporate income tax: 9%

Source: PWC Worldwide Tax Summaries

8.1 Important Updates To Taxation Information

  • In December 2016, Hungary's National Assembly approved several laws and amendments that will have a considerable impact on the operating environment for businesses. One such bill established a 9% flat rate corporate tax starting from January 1, 2017. This tax decrease has made Hungary's tax rate one of the lowest in the EU.
  • International Financial Reporting Standards (IFRS) has been adopted in Hungary. For many companies, the mandatory adoption is postponed from 2017 to 2018.
  • From January 1, 2018, the VAT rate on internet access services and on fish for consumption purposes is reduced from 18% to 5% and from 27% to 5%, respectively. Furthermore, the VAT rate on the edible by-products and meat offal of domestic swine is also reduced to 5%. The catering sector is also benefited from VAT rate cuts because from January 1, 2018 the VAT rate on meals provided and certain non-alcoholic beverages prepared locally in bars and restaurants is reduced from 18% to 5%. Preferential tax rates were introduced relating to hybrid and electronic cars.
  • As of January 1, 2018, the employer social charge rate has been additionally reduced from 22% to 19.5%. Consequently, the employers’ payroll expenses have been reduced by 2% (2.5/123.5). Also, the rate of healthcare tax has been reduced from 22% to 19.5% as of 2018 in line with the reduction of the employer social charge rate. As a result, public dues payable for business meals, corporate events, and certain fringe benefits have been reduced from 43.66% to 40.71% in total.

8.2 Business Taxes

Type of TaxTax Rate and Base
Corporate Income Tax9% on taxable earnings
Dividends5% on net earnings (except distribution by companies in oil and gas sector)
Capital Gains Tax9% of accounting profit
Mines, energy producers, and energy distribution system operators are subject to energy suppliers’ income tax31%
Innovation contribution0.3%
Value added taxPayable at the general rate of 27%. For some goods and services, reduced rates of 18% and 5% are applicable.

Date last reviewed: August 14, 2018

9. Foreign Worker Requirements

9.1 Localisation Requirements

Hungary's rules and regulations regarding labour mobility are broadly in line with EU directives. Most non-EU citizens require a work visa and permit in order to go and work in Hungary, which generally takes about a month to obtain.

9.2 Obtaining Foreign worker permits for skilled workers

There are certain requirements that businesses must meet when trying to bring in foreign workers from non-EU states. Firstly, a workforce demand is required. The hiring company must advertise the job at the Hungarian Labour Office for a fixed period (around 15 days). This is to give a chance for unemployed Hungarian citizens to apply for the position. Thereafter, a work permit may begin to be processed. Most work permits and working visas are issued for two years only. Both of these documents can be renewed if the employee wishes to extend his/her stay in Hungary and continues to fulfil the application requirements. Generally, the highest number of foreign workers employed with a work permit at the same time in the whole territory of Hungary cannot exceed the number of announced applications in an average month in the year before the year in question.

9.3 Visa/Travel Restrictions

Nationals of Canada, Australia, and the USA intending to stay in Hungary for more than 90 days need to apply for a long term stay visa, whereas EU nationals staying longer than 90 days need only register with the immigration department. In addition, citizens of many other countries may travel to Hungary without a visa and may stay there for a maximum period of 90 days. For Hong Kong, this exemption applies only to holders of a Hong Kong Special Administrative Region passports.

9.4 Schengen Visa

Hungary is also part of the Schengen Agreement as of December 7, 2017 which has made traveling between member countries much easier and less bureaucratic. The Schengen visa and entry regulations are only applicable for a stay not exceeding 90 days. In the wake of the migrant crisis in Europe, the Schengen States have tightened controls at their common external borders to ensure the security of those living or travelling in the Schengen Area.

Source: Hungarian Government websites, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody'sBaa3 (Stable)04/11/2016
Standard & Poor'sBBB- (Positive)16/09/2016
Fitch RatingsBBB- (Positive)09/03/2018

Source: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201620172018
Ease of Doing Business Index
40/18941/19048/190
Ease of Paying Taxes Index
95/18977/19093/190
Logistics Performance Index
31/160N/A31/160
Corruption Perception Index
57/17666/180N/A
IMD World Competitiveness46/6352/6347/63

Source: World Bank, IMD, Transparency International

10.3 Fitch Solutions Risk Indices


World ranking
201620172018
Economic Risk Index
33/201
Short-Term Economic Risk Score63.369.470
Long-Term Economic Risk Score67.269.270.1
Political Risk Index
69/201
Short-Term Political Risk Score72.77173.5
Long-Term Political Risk Score72.271.470.2
Operational Risk Index  43/201
Operational Risk Score61.863.162.8

Source: Fitch Solutions
Date last reviewed: August 15, 2018

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK
Economic growth rates in Hungary will ease in the coming years, but remain comfortably higher than in more developed EU peers. Emerging from a protracted period of private deleveraging, the economy will be boosted by stronger consumer demand. Looking ahead, the increasingly tight labour market and subdued foreign direct investment inflows will weigh on output. Gross external debt will remain high by regional standards, although the downward trajectory will ensure it is sustainable in the medium term.

OPERATIONAL RISK
Investors in Hungary benefit from the country's relatively stable operating environment and a highly urbanised labour force with a strong skills base. As a member of the EU, Hungary offers open markets, and an increasingly competitive corporate tax regime, while its geographic location and strong overland transport links consolidate its position as a major sub-regional trade hub within Central and Eastern Europe.

Source: Fitch Solutions
Date last reviewed: August 16, 2018

10.5 Fitch Solutions Political & Economic Risk Indices

Graph: Hungary short term political risk index
Graph: Hungary short term political risk index
Graph: Hungary long term political risk index
Graph: Hungary long term political risk index
Graph: Hungary short term economic risk index
Graph: Hungary short term economic risk index
Graph: Hungary long term economic risk index
Graph: Hungary long term economic risk index

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Economic and Political Risk Indices
Date last reviewed: August 6, 2018

10.6 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Hungary Score63.255.663.462.471.3
Central and Eastern Europe Average61.155.063.463.662.5
Central and Eastern Europe Position (out of 8)67786
Emerging Europe Average56.754.1
58.457.456.8
Emerging Europe Position (out of 28)7131010
8
Global average49.749.8
50.049.349.9
Global Position (out of 201)435748
4837

100 = Lowest risk; 0 = highest risk
Source: Fitch Solutions Operational Risk Index

Graph: Hungary vs global and regional averages
Graph: Hungary vs global and regional averages
Country
Operational Risk IndexLabour Market Risk Index
Trade and Investment Risk IndexLogistics Risk IndexCrime and Secruity Risk Index
Estonia71.0
59.1
77.2
70.5
77.0
Czech Republic70.6
57.7
70.0
70.2
84.5
Poland
68.9
55.6
69.2
72.3
78.4
Lithuania67.4
55.2
71.8
71.3
71.5
Latvia65.1
57.5
68.4
67.9
66.6
Hungary63.2
55.6
63.4
62.4
71.3
Slovakia62.9
49.7
67.7
60.7
73.5
Belarus57.1
56.5
59.2
62.7
49.9
Russia56.0
63.6
56.2
63.4
40.9
Moldova45.3
39.8
49.2
48.7
43.4
Ukraine45.154.9
45.6
49.5
30.5
Regional Averages61.1
55.0
63.4
63.6
62.5
Emerging Markets Averages46.8
48.0
47.5
45.8
46.0
Global Markets Averages49.7
49.8
50.0
49.3
49.9

100 = Lowest risk; 0 = highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: August 6, 2018

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Hungary

Graph: Major export commodities to Hungary (2017)
Graph: Major export commodities to Hungary (2017)
Graph: Major import commodities from Hungary (2017)
Graph: Major import commodities from Hungary (2017)
Graph: Merchandise exports to Hungary
Graph: Merchandise exports to Hungary
Graph: Merchandise imports from Hungary
Graph: Merchandise imports from Hungary

Exchange Rate HKD/US$, average
7.78 (2011)
7.76 (2012)
7.76 (2013)
7.76 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
Source: Hong Kong Census and Statistics Department, Fitch Solutions


2017
Growth rate (%)
Number of Hungary residents visiting Hong Kong10,384-0.5

2017
Growth rate (%)
Number of European residents visiting Hong Kong1,929,824-0.2

Source: Hong Kong Tourism Board
Data last reviewed: August 15, 2018

11.2 Commercial Presence in Hong Kong


2016
Growth rate (%)
Number of EU companies in Hong Kong2,107N/A
- Regional headquarters442
- Regional offices717
- Local offices948

Source: Hong Kong Census & Statistics Department

11.3 Treaties and agreements between Hong Kong and Hungary

Double Taxation Avoidance Agreements
Note: Hungary has a double taxation agreement and Investment Promotion & Protection Agreement (IPPA) with China (mainland), which it concluded on June 17, 1992. This came into effect on December 31, 1994 and has entered into force in both countries on December 31, 1994.

Source: Hong Kong Inner Revenue Department

11.4 Chamber of Commerce (or Related Organisations) in Hong Kong

Consulate General of Hungary in Hong Kong and Macao
Address: Suites 1208-09, 12/F, ICBC Tower, Three Garden Road, Central, Hong Kong
Email: mission.hgk@mfa.gov.hu
Hours of Business: Monday to Thursday 9:00 a.m. - 5:00 p.m
Tel: (852) 2878 7555
Fax: (852) 2878 7010

Source: Consulate General of Hungary in Hong Kong and Macao

The European Chamber of Commerce in Hong Kong
The European Chamber of Commerce creates business opportunities via its network of Chambers, business associations and government agencies.

Address: Room 1302, 13/F, 168 Queen’s Road, Central, Hong Kong
Tel:  (852) 2511 5133
Fax: (852) 2511 6833

Source: The European Chamber of Commerce in Hong Kong

11.5 Visa Requirements for Hong Kong Residents

Holders of a valid HKSAR Passport or valid BNO Passport can enjoy visa-free access to enter Hungary for the purpose of short-term visits of up to 90 days within a 180 day period. For work purposes, Hong Kong citizens need a working visa in Hungary.

Source: Consulate General of Hungary in Hong Kong and Macao

Content provided by Picture: Fitch Solutions – BMI Research