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2.1 An overview of the Hungarian economy

Major macroeconomic indicators

 

2007

2008

2009

Population (million of inhabitants)

10.1

10.0

10.0

Gross domestic product (US$ billion)

138

155

129

Real GDP growth (%)

1.0

0.6

-6.3

Consumer prices (year-on-year % change)

8.0

6.1

4.2

Exports of goods (US$ billion)

94.6

108.2

83.1

Imports of goods (US$ billion)

94.7

108.9

77.4

Average exchange rate (Hungarian forint per US dollar)

184

172

202

Following its accession to the EU on 1 May 2004, Hungary, by far the largest export market for Hong Kong in Eastern Europe, has entered into another stage of further integrating with Western Europe. Relatively speaking, Hungary’s business environment is more liberal than many other Eastern European countries. Accession to the EU has only reinforced the country’s solid fundamentals. Notably, its better business infrastructure, including its financial and legal environment, has enabled the country to play a leading role in business, finance and trade in Central and Eastern Europe (CEE), making it a place conducive to business activities. The Hungarian economy has expanded steadily in the past six years, with GDP growing by an average of 2.8% per year during 2004-2008. However, the average annual growth decreases to 1.3% when we take the recession year 2009 into account.

Chart: Real GDP growth and unemployment in Hungary

Although the country, with a population of 10 million, is not the largest among the new EU members, its per capita income is one of the highest in the CEE. This is due to a number of factors, especially the inflow of foreign capital. In particular, the privatisation law promulgated in 1995 cleared away obstacles to the privatisation of state-owned enterprises. This has encouraged foreign participation in the economy, creating a major impetus to economic growth. Coupled with the country’s notable entrepreneurial skills and well-educated labour force, Hungary has been among the major recipients of foreign direct investment in the CEE, even well before its accession to the EU. The government’s recent proposal to reduce the corporate tax rate from 19% to 10% for companies with annual profits of less than 500 million Hungarian forints and a number of other cumbersome taxes are widely considered means of further boosting the country’s long-term competitiveness and therefore foreign investment.

Chart: FDI and trade balance in Hungary

Sector-wise, the manufacturing sector has been the major investment target of foreign investors. This has helped enhanced the efficiency of the manufacturing sector, and in turn has contributed significantly to the country’s economic growth in recent years. Investment in relation to processing production, in particular, has served to facilitate industrial production and hence external trade. This has played an important role in establishing a number of core industries in Hungary, such as the assembly of automobiles, as well as the manufacturing of auto-parts, electronics parts and components, chemicals and food.

Putting the positive portrayal aside, the growth of the Hungarian economy has been hampered by its sizable external and public debt. Amid the global credit crunch, the country even turned to the IMF and the EU for financial assistance in the form of bailout plans. Weak fiscal governance and high level of indebtedness have rendered the country more vulnerable to capital flight and rising borrowing costs. Under the shadow of the ongoing European debt trouble, the Hungarian economy may continue to face uncertainty in the near future.

Content provided by Hong Kong Trade Development Council
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