Hungary seeks rapprochement with bruised foreign investors

Prime Minister Viktor Orban’s treatment of external businesses still rankles
Viktor Orban, Hungary’s prime minister © Getty

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Nearly three years after Hungary’s government asked the IMF to close its Budapest office and vacate the country, Budapest last month repaid the last portions of its 2008 EU-IMF loan package and closed a chapter in its turbulent relationship with international lenders.

For Viktor Orban, the country’s prime minister, the closing payment on €20bn of loans was the culmination of his radical fiscal adjustment strategy to rescue the public finances while putting money in voters’ pockets and avoiding unpopular austerity measures.

That strategy was achieved largely through the nationalisation of compulsory private pension funds and targeted taxation, often at the expense of foreign investors who have complained of punitive taxes on some industries and unpredictable regulation.

However, steady reductions in Hungary’s bank tax, long Europe’s highest and the bane of struggling Italian- and Austrian-owned Hungarian subsidiaries, have raised hopes of a more favourable environment and a new start for foreign direct investment.

The bank tax, which is calculated on the basis of assets not profits, was cut by about 60bn Hungarian forint (€190m) in 2016, down from about HUF115bn in 2015, and is projected to fall by a further HUF10bn in 2017 according to May’s budgetary proposals.

International observers, including the European Commission and IMF, noted with alarm a spate of new taxes and regulatory changes since 2010, which shifted the fiscal burden on to foreign investors and risked saddling Hungary with a reputation as hostile towards investors.

Budapest has now launched a charm offensive, pointing to internationally acknowledged improvements in the banking sector as evidence of a more investor-friendly climate.

Hungarian officials now promise a warm reception for investors and point to reductions in the bank levies as evidence. “Hungary is performing well, our growth figures are better than expected, legislative change is reducing and we are reducing sector-specific legislation — all of this puts Hungary in better shape,” said Agnes Hornung, state secretary at the ministry for national economy.

If true, the new attitude marks a radical turnround. Foreign investors bore much of the burden of fiscal adjustment since 2010. The banking sector lost about HUF500bn (€1.6bn) in 2014, partly due to the controversial bank tax, but also due to compensation for “unfair charges” paid by customers.

Foreign media companies faced a 50 per cent levy on advertising revenue. That has now been rescinded following complaints from the European Commission that it constituted a “political weapon”. Foreign retailers, energy suppliers and tobacco sellers have also complained of discrimination.

International lenders still express concern about the “adverse business environment” that weighs on foreign investment. Sceptics claim that relief for lenders is hardly surprising given that Hungarian investors, including the state itself, now dominate the sector.

Zoltan Torok, head of research at Raiffeisen Bank Hungary says: “The bank tax is a unique case in my view but the government probably intends to use [its reduction] to project a more investor-friendly image. At the same time, it’s true we are seeing less changes to the tax regime — things are becoming more predictable.”

€190m

The amount by which Hungary cut its bank tax in 2016

In the IMF’s view, the bank tax cuts are welcome but a report published in late April urged Budapest to go further to improve the business climate and “reduce the regulatory burden, enhance policy predictability, and limit state involvement in the economy”.

Hungarian officials claim a new commitment to reducing the scale of unpredictable and unfavourable taxes and regulations is already bearing fruit. Robert Esik, president of the Hungarian Investment Promotion Agency (HIPA), says the agency’s activity levels reflect a recovery in investor interest.

“At the beginning of 2015, we had 96 investments in the pipeline, this year we have 169 active investment projects where the investor is finalising decisions — this is partly due to the government’s commitment to an investor-friendly business environment.”

The stock of foreign direct investment (FDI) in Hungary was €84.3bn in 2015, up by €3bn on 2014 and representing about 78 per cent of Hungary’s GDP, according to HIPA, which seeks to lure foreign investors to the central European country.

One sector which has received a consistently warm welcome is German-dominated automotive manufacturing. The industry is the primary source of FDI, accounting for about 50 per cent of capital expenditure resulting from FDI into Hungary during 2015 and one-third of new jobs created by HIPA-supported projects.

Daimler, Audi and TK all have manufacturing and research and development plants in Hungary, which offers low labour costs, and generous tax incentives and subsidies — worth up to 50 per cent of investment, in some cases. Daimler recently announced it would spend more than €250m building a car body assembly plant at its existing site in Kecskemet.

Observers say the contrast in the experience of foreign manufacturers compared with service-oriented investors points to Hungary’s drive to position itself as a low-cost manufacturing and logistics base in Germany’s economic hinterland.

Cheerleaders for the central European country say manufacturers in particular can look forward to a more predictable regulatory environment.

“Manufacturers feel comfortable having the increased predictability, underpinned by the state budget plan,” says Mr Esik.

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