The U.S. Department of State Investment Climate Statements provide information on the business climates of more than 170 economies and are prepared by economic officers stationed in embassies and posts around the world. They analyze a variety of economies that are or could be markets for U.S. businesses.
Topics include Openness to Investment, Legal and Regulatory systems, Dispute Resolution, Intellectual Property Rights, Transparency, Performance Requirements, State-Owned Enterprises, Responsible Business Conduct, and Corruption.
These statements highlight persistent barriers to further U.S. investment. Addressing these barriers would expand high-quality, private sector-led investment in infrastructure, further women’s economic empowerment, and facilitate a healthy business environment for the digital economy.
Executive Summary
With a population of 9.7 million, Hungary has an open economy and GDP of approximately USD 179 billion. Hungary has been a member of the European Union (EU) since 2004, and fellow member states are its most important trade and investment partners in addition to the United States.
Since 2010, the Fidesz-led administration has adopted a populist approach to economic management. Through legislation, regulation, and public procurements, the government has supported consolidation of “strategic” industries into the hands of government-linked firms. Companies and industries targeted in this fashion sometimes find themselves under greater scrutiny from tax authorities and other regulatory agencies. Government-linked firms have also been noticeably favored in public procurement, leading to significant transparency concerns. The European Union has withheld billions of euros in budgetary support to Hungary pending transparency and rule of law reforms. The Hungarian parliament has repeatedly renewed a “state of emergency” in recent years which gives the Prime Minister’s office the power of rule by decree. This has sometimes been used to impose overnight “windfall” taxes on certain industries that in some cases have severely impacted profit margins.
Foreign direct investment (FDI) from Asian sources has increased in the past decade. South Korea maintained its leading position as largest investor in Hungary as it invested the most on an annual basis in 2022 for the third time after 2019 and 2021. In 2022, the U.S. direct investment position in Hungary was $14.4 billion, an increase of 2.2% from 2021 (www.bea.gov). Macroeconomic indicators were generally strong before the COVID-19 pandemic, with GDP growing by 4.9% in 2019. In 2020, however, Hungary’s GDP decreased by 5.1%. As the Government of Hungary (GOH) increased spending to support the economy and other priorities, the budget deficit in the first half of 2023 reached 11.1% of GDP, while the EU average was 3% Ratings agencies in 2020 maintained Hungary’s sovereign debt at BBB, two notches above investment grade. In 2023 Fitch altered Hungary’s stable outlook to negative, whereas Standard and Poor’s revised it to “Stable.” Moody rating is set at Baa2 with stable outlook. In 2020, the Finance Ministry forecasted 5 to 5.5% economic growth and a 6.5% budget deficit for 2021. Update: In 2021 the budget posted a deficit of 6.8%in proportion to GDP. The 2022 deficit target is 4.9% of GDP and the 2023 deficit target is 3.5% of GDP. In 2021 Hungary’s GDP grew by 7.1%; and by 4,6% in 2022. In the first quarter of 2023, Hungary’s GDP contracted by 0,9% in year-on-year terms. The performance of the economy fell by 1.1% compared to the same period of the previous year and by 0.3% compared to the previous quarter. Therefore, the Hungarian economy remained in recession in the first quarter of 2023, as was widely expected, the recession was prolonged. Hungary’s growth advantage compared to the European Union has disappeared, as the domestic growth rate fell short of the EU average. Hungary’s central location in Europe and high-quality infrastructure have made it an attractive destination for Foreign Direct Investment (FDI). Between 1989 and 2019, Hungary received approximately USD 97.8 billion in FDI, mainly in the banking, automotive, software development, and life sciences sectors. Hungary has become a tire manufacturing center, with four major multinationals operating factories, namely Hankook in Dunaújváros, Michelin in NyíregyházaTatabánya, and Apollo in Gyöngyös. Another tire manufacturer is expected to announce its investment namely the South Korean Kumho Tire. The GOH actively encourages investments in manufacturing and sectors promising high added value and/or employment, including research and development, defense, and service centers. To promote investment, the GOH lowered the corporate tax rate to nine % in 2017, among the lowest rates in the EU. Hungary’s Value-Added Tax (VAT), however, is the highest in Europe at 27%. In June 2022, the government rejected adopting the Global Minimum Tax agreement, contrary to its previous commitment.
Despite these advantages, Hungary’s regional economic competitiveness has declined in recent years. Since early 2016, multinationals have identified shortages of qualified labor, specifically technicians and engineers, as the largest obstacle to investment in Hungary. In certain industries, such as finance, energy, telecommunication, pharmaceuticals, and retail, unpredictable sector-specific tax and regulatory policies have favored national and government-linked companies. Additionally, persistent corruption and cronyism continue to plague the public sector. According to Transparency International’s (TI) 2022 Corruption Perceptions Index, Hungary placed 77th worldwide and held the last place out of 27 EU member states. In 2016, the GOH withdrew from the Open Government Partnership (OGP), a transparency-focused international organization, after refusing to address the organization’s concerns about transparency and good governance. Both foreign and domestic investors report pressure to sell their businesses to government-affiliated investors. Those who refuse to sell claim they face increased tax audits or spurious regulatory and court challenges.
Analysts remain concerned that the GOH may intervene in certain priority sectors to unfairly promote domestic ownership at the expense of foreign investors. In September 2016, Prime Minister (PM) Viktor Orban announced that at least half of the banking, media, energy, and retail sectors should be in Hungarian hands. Observers note that through various tax changes the GOH has pushed several foreign-owned banks out of Hungary. The GOH has claimed it has increased Hungarian ownership in the banking sector to close to 60%, up from 40% in 2010. In the energy sector, foreign-owned companies’ share of total revenue fell from 70 % in 2010 to below 50% by the end of 2019. Foreign media ownership also has decreased drastically in recent years as GOH-aligned businesses have consolidated control of Hungary’s media landscape. The number of media outlets owned by GOH allies increased from around 30 in 2015 to nearly 500 in 2018. In November 2018, the owners of 476 pro-GOH media outlets, constituting between 80 and 90% of all media, donated those outlets to the Central European Press and Media Foundation (KESMA) run by individuals with ties to the ruling Fidesz party. Update: following the national elections in April 2022, government members announced that Hungarian ownership amounts to an average of 51% in the economy, but there are differences among sectors. They noted that Hungarian ownership needs to be raised in food retail, production of construction materials, insurance, and telecommunication.
As part of its COVID-19 pandemic response, the Parliament passed state of emergency (SOE) legislation in March and November 2020 that gave the GOH broad authority to bypass Parliament and govern by decree. The first SOE law did not have a sunset clause and remained in effect until June 2020 when the GOH repealed it. The GOH passed a second SOE law in November, this time for a 90-day period. Following the expiration of the 90-day term, the Parliament extended the SOE for another 90 days in February 2021. Update: In 2021 and 2022 the government passed subsequent measures to extend the emergency, currently in force until May 24, 2024, based on the war in Ukraine and the humanitarian crisis. As part of the emergency measures, the GOH also extended measures for national security screening of foreign investments from December 31, 2020. The European Court of Justice (“ECJ”) has ruled that Hungary’s foreign investment screening law is incompatible with EU law, in particular the freedom of establishment.
To access the ICS, visit the U.S. Department of State Investment Climate Statements website.