Wednesday, 06 Nov 2013
Businessman reading newspsper
Overseas Business Risk - Hungary
Political and Economic
In April 2010 the Opposition centre-right Fidesz party - in alliance with the Christian Democrats (KDNP) - won a landslide electoral victory with 53% of the vote which granted them 263 seats in Parliament (out of the 386). Fidesz-KDNP scored another sweeping victory in the October 2010 local elections. The Hungarian Socialists Party (MSzP) led by Attila Mesterházy formed a weak main opposition with 59 seats. Since then the Socialists have lost 10 MPs who followed former Prime Minister Ferenc Gyurcsány when he left the MSzP to found his new party, the Democratic Coalition, in October 2011. The extreme right-wing Jobbik party led by Gábor Vona currently has 43 seats. Newcomer leftist-green party LMP lost more than half of their seats when a splinter group of 8 MPs formed a new party called Dialogue for Hungary in early 2013.
The governing Fidesz - KDNP alliance which has a 2/3s majority in Parliament has set out to reshape Hungary’s political and legal landscape with great resolve, pushing dozens of new and amended pieces of legislation through Parliament at great speed. In April 2011 Parliament adopted a new Constitution (now called Fundamental Law) which came into force on 1 January 2012. Linked to the new Constitution, Parliament also passed a package of legislation affecting the judiciary system, the electoral system, the status of churches, the Central Bank and a wide range of other key areas. Prime Minister Orbán has described these changes as part of Fidesz-KDNP’s efforts to sweep away the “last vestiges of communism” and to reassert the basic values of “family, order, home, work and health.
The next general election will be held in the spring of 2014, either in April or May.
Hungary has a small and open economy, and therefore the country is sensitive to developments in the external environment. In 2010 GDP growth reached 1.1%. In 2011 the growth was 1.8%. In 2012 there was a 1.7% decline in growth and only slight growth is expected for 2013. In terms of budget deficit, Hungary performed well in a European comparison in 2011 with a figure slightly under 3% which the country continued in 2012 enabling Hungary to get out of the Excessive Deficit Procedure. Unemployment was 10.9% in 2012 and is currently 9.9% . Inflation was 6% in August 2012 but due to centrally imposed utility bill cuts reached record low levels and in September 2013 it reached 1.4%. The government secured an EU-IMF loan in November 2008 which expired in October 2010.. Earlier aspirations to join the Euro as soon as practical now appear to be on hold and according to the Prime Minister it is not expected before the end of this decade.
Despite some unfavourable developments, the Hungarian banking system is stable. The Capital Adequacy Ratio of the banking system was 13.5% at the end of 2011, well above the minimum. 90-95% of the banking sector is foreign owned in Hungary (even in the case of Hungarian bank OTP, 92% of the shares are owned by foreign investors)..
The main risks are related to the external global economic environment, including global financial processes, and to Hungary's fiscal and economic policies. Downside risks mainly relate to the fragility of the Euro area economy and financial system; while the pro-cyclical behaviour of the fiscal and monetary policy and the banking sector are the most significant domestic factors.
The government’s economic policy is based on two pillars: increasing competitiveness and the levels of employment. Objectives include creating one million new jobs in ten years, mainly in the following sectors: construction industry, agriculture, and tourism. Generating economic growth, stable fiscal policy, simplified tax system, improved education, research and innovation, support of SMEs, reduced layers of bureaucracy, and consumer protection are among the aims.
The balance of Foreign Direct Investment to Hungary was EUR 1.7 billion in 2010, and – with a huge boost in Q4 – EUR 2.9 billion in 2011. The net FDI was EUR 2.25 billion in 2012 which was mainly to recover bank capital adequacy levels.
Hungarian economic performance is fundamentally export-driven and tied to its major – mainly EU – partners. Exports have steadily risen since 1993. Almost 80% of foreign trade flow to EU countries, especially to large Old Member States, and regional (V4) partners are also important. Main foreign trade partners of Hungary include Germany (25.7%), Italy (5.7 %), the United Kingdom (5.4%), France (5.4 %), Romania (5.3%), Slovakia (5%), Poland (3.7%) and Czech Republic (3.2%).
Nearly 90% of GDP is now generated by the private sector compared with just 10% in 1990. Hungary is concentrating on structural investment, and has a higher skills-base than most of its neighbours; over 75% of trade is now with the European Union. In terms of business, Hungary has many advantages but lack of transparency and over-regulation are some of the problems doing business in the country.
Hungary has been a member of the International Labour Convention since 1992 and since its accession it has ratified 72 of its conventions.
On 29 November 2011 ILO expressed criticism of the then planned reform of the Hungarian labour law and suggested that protection against dismissal should be extended for at least three months after child birth leave. Bonded labour, indentured labour or slavery are not in practise in the country. Trade unions are legal and there are a large number of them in different sectors. It is the legal right of workers to join the union of their choice. The right to strike is legally guaranteed.
On 1 April 2012 the Minister of National Economy appointed a Commissioner for improving the working conditions of women. Concerned citizens, including workers, may also turn to the Ombudsman of Fundamental Rights if they feel their rights have been violated. There are no indigenous issues or examples of land grab. Child labour is against the law and education is universal.
Bribery and Corruption
Bribery is illegal. It is an offence for UK nationals and bodies incorporated under UK law, to bribe anywhere in the world.
In 2012, Hungary was ranked 46th out of 178 countries in the Transparency International’s corruption perception index (CPI), in comparison with a rank of 54th in 2011.
Corruption seems to affect more than half of foreign businesses in Hungary. The number of registered corruption cases increased by over 50% to 740 in 2011. Corruption is one of the causes of black economy and in this sense the proportion of black economy indirectly indicates the scale of corruption. The size of the black and grey economy is estimated to be between 15-18% of GDP.
In addition, the tax and social contribution base is narrow. Most typical cases of hidden economy are illegal employment (30%), services without invoices (20%) and abuse related to wages (17%). The previous government launched several measures aimed at reducing the black economy between 2006 and 2007, when tax income increased by 10% both in 2006 and 2007, while the new government introduced flat tax system in 2011 to help whiten the grey economy and create jobs, consequently reducing corruption.
Bridge in Budapest
Compared to other EU countries the joint burden of taxes on profit - company tax, special solidarity tax and the turnover tax collected by local government - and labour has traditionally been high in Hungary. On the other hand the group of taxpayers is small, overhead-type taxes are common and many smaller taxes exist. High tax and social contribution requirements are matched with low payment morale and there is a general attitude of searching loopholes in regulations. Due to tax evasion, a sum equal to a quarter or third of the GDP is "missing" from the tax base. The volume of tax fraud is highest in micro businesses and large companies, with documentation in the former often missing. Employment of illegal labour is the widespread. Approximately 80% of tax fraud cases detected by the Tax Authority (NAV) are related to VAT. Tax fraud is most prevalent in the construction industry, but is also pervasive in IT parts trading, car trading and catering. According to the Tax Authority, tax discipline is slowly improving in spite of the low tax morale.
In general, threat level from terrorism is low in Hungary.
However, the Hungarian government recently set up a counterterrorism centre in Budapest which is charged with investigating acts of terrorism, kidnappings and the hijacking of means of public transport.
Protective Security Advice
Although there has been no evidence of British organisations being specifically targeted, high profile organisations are advised to remain vigilant and regularly review their security measures.
Tourists are advised to take sensible precaution against risks common in Western Europe. Being charged exorbitant prices in certain bars, clubs and restaurants in Budapest (mainly in District V.) is not uncommon with western tourists. If approached on the street with an invitation to enter a club or bar, treat that advice with extreme caution. Common scams include adding a 20,000 HUF (£60) surcharge per drink to the final bill or charging up to 100,000 HUF (£300) for a meal. Individuals who have been unable to settle their bills have frequently been accompanied by the establishment’s security guards to a cash machine and made to withdraw funds under threats of violence.
Meeting in the British Embassy
Hungary's copyright law complies with international norms and the country has implemented the relevant EU Directives.
Hungary has one of the highest broadband penetration in Central and Eastern Europe and, as a result, digital copyright piracy has grown significantly and a 2011 ESA study suggest that Hungary is in the top 20 countries worldwide in terms of unauthorized file sharing.
Hungarian consumers and even legislators, however, seem to exhibit an attitude that does not fully support copyright. Over the past year, the copyright industries have continued to actively cooperate with Hungarian law enforcement officials on investigations and prosecutions and have provided educational training to police, customs, prosecutors, and judges. The police, who have generally done a good job supporting Internet piracy investigations, are under-resourced and under-equipped to tackle this grave problem. There also are onerous requirements to prove ownership of rights and requests for expert opinions on all goods seized that strain limited resources of both the government and the rights holders.
Hungary's overall crime rate has slightly increased over the past few years, mainly owing to fraud and property crimes. Violent crime is on a downwards trend, and street theft is no worse than in other European countries. The organized crime groups in Hungary control all prostitution, stolen cars rings, gambling, and narcotics trafficking. The police are working hard to combat the problem, but so far without particular success.
According to the World Security Network Foundation (WSNF), due to its geographical location and good public infrastructure, Budapest is a major centre of illegal pornographic material and contraband cigarettes. WSNF also estimates that construction companies and business groups involved in public procurement are increasingly subject of the control of organized crime..