Weekly Briefing, Vol. 42, No. 2 (HU), July 2021
Investments in Hungary
During the worst of Covid-19 the pandemic, when economic lockdowns curtailed economic activity and limited growth, there was debate around the world about the best strategy to stimulate the economy. In the majority of Western European countries and in the United States, direct payments to citizens were adopted and used as a means to revive the economy. Another way was preserving jobs and supporting investment activities. The first approach is a more direct intervention, but it has short-term effects, while the second approach takes more time for the effects to kick in. In this debate, Hungary seems to have chosen the second strategy, which was more in line with the pre-pandemic strategy.
Introduction
When the first negative effects of the pandemic were felt in the Hungarian economy, the Hungarian government made it clear that preserving jobs was the main goal of the government’s economic policies. This policy proved successful in 2020 and 2021, as both unemployment and employment rates did not fluctuate as much as in most EU member states. The second objective was to boost investment, which suffered a slump immediately after the first wave of the pandemic (March-April 2020) and began to decline. The first significant improvement in investment came in the last quarter of 2020. This briefing looks at investment trends in Hungary, while also briefly discussing tensions in the real estate market, in an attempt to underline the investment-driven nature of Hungary’s development strategy.
Hungarian investments in 2021
According to the latest investment press release from the Hungarian Central Statistical Office (HCSO), investment grew 2.5 percent in the first quarter of 2021 compared to the corresponding quarter of 2020 and 0.5 percent in the previous quarter. The less positive feature of investment growth was that it was driven by government and households rather than enterprise development, however, it can be interpreted as a positive sign that investment in machinery and equipment, which accounts for 46 percent, increased by 7.0 percent in Q1 2021. Looking at the sectors of investment growth, growth was driven by investment in the health sector (45 percent ), public administration (33 percent ) education (31 percent ) and real estate activities (12 percent ).
Construction investment stagnated (down 1 percent) in the first quarter of 2021, but we must add that the main reason for the stagnation is capacity problems, as the construction sector is currently reaching its capacity limits, which is also reflected in prices in this sector. The rise in construction prices has been a public concern recently. According to National Federation of Hungarian Building Contractors, timber prices in the construction sector have increased by 73 percent since January 2021, and other prices also grew significantly, in some cases by more than 100 percent. On the one hand, we can see that the price increase in the construction sector is a global phenomenon rather than one driven by local factors, but on the other hand, we cannot rule out the possibility that in some cases the increase was exacerbated by local speculators. And for this reason, the government has intervened and ordered that the export of certain building materials be restricted by the introduction of notifications. This means that only after notification can iron, steel, sand, stone, pebbles and insulation materials be exported from Hungary.
Economy development strategy
From the government’s point of view, it is clear that maintaining previous levels of investment during the pandemic was a crucial element of the development strategy. The Hungarian Minister of Finance emphasized that the goal was to maintain the national economic investment and public investment at a high level, at which the country is capable of boosting the economy after the pandemic. The development strategy of the counter-cyclical economy also has other features, the minister concluded. He drew five important conclusions from the pandemic:
- due to the vulnerability of global supply chains, investments in the health sector should be supported by the government, so far investments in this sector amounting to 65 billion forints have been decided by the government.
- due to the vulnerability of global supply chains, Hungarian products need to cover the chains more broadly.
- To increase the number of Hungarian products in the global supply chain, we need Hungarian companies and brands.
- Digitalization, automatization and robotization are key elements of competitiveness that can increase economic growth in Hungary by 1.5 percent.
- “Turnkey” industrial parks are needed to attract foreign investment.[1]
This approach was confirmed by the Hungarian Prime Minister who, after the meeting of Slovenia and the four Visegrad countries in Ljubljana, stressed that the relaunch of the economy European Union needs investment, security and the expansion of markets.[2]
The success of crisis management was underpinned by the latest IMD World Competitiveness Center report, which ranked Hungary 42nd. This means that Hungary has improved by 5 places, as last year the country was ranked 47th. We can add that five years ago Hungary was ranked 57th. Looking at the sub-indicators, Hungary’s economic performance was the most impressive element, bringing the country to 8th place. In 14 of the 20 sub-indicators, Hungary performed better. (See more in Table 1!)
| Table 1. Hungary performance in competitiveness (global ranking) | ||
| 2020 | 2021 | |
| Economic performance | 19 | 8 |
| Government efficiency | 47 | 40 |
| Business efficiency | 59 | 56 |
| Infrastructure | 41 | 37 |
| Source: IMD World Competitiveness Center | ||
One element in economic performance deserves our attention, Hungary was ranked 10th when it comes to international investment worldwide. In 2020, global foreign direct investment (FDI) in the world economy decreased by 42 percent, while FDI inflows to Hungary increased by 140 percent! The amount of FDI inflows was USD 1.154 billion in 2019 and USD 2.769 billion in 2020. One of the reasons why Hungary became so popular with foreign companies was the Hungarian government’s promise in 2020 to contribute financially to FDI if the company did not lay off employees. The government’s contribution was 50 percent of the value of the investment. In 2020, most of the FDI came from China, which is a confirmation of the Easter Opening Policy launched in 2011.
Looking at these aggressive policies, one can understand why the Hungarian government vehemently opposes the idea of the so-called global tax agreement. The idea received the support of 132 countries and jurisdictions this year, however, it would be a serious blow to the Hungarian investment strategy as the Hungarian corporate tax level remains one of the lowest in the EU and the world.
For this reason, the Hungarian government has made it clear that it does not support the introduction of the global minimum corporate tax, as the low Hungarian corporate tax is an essential element of the competitiveness of the Hungarian economy. The main idea of the global tax, the minimum of which is 15 percent, is that it shifts the right of taxation to the profits of more than USD 100 billion, and, more importantly, that it is not necessary to set the tax rate at 15 percent in each country to be effective everywhere, namely other countries can increase the tax levy to the minimum on the income of companies originating from countries that have lower corporate tax rates. In other words, multinational companies will not move their activities to Hungary only on the basis of lower taxes because the difference has to be paid in another country. The main conclusion here is that Hungary needs to increase its efforts and find new policy instruments that can attract multinational firms to Hungary.
Conclusions
The investment-led development strategy seems to be successful in the case of Hungary. In 2019, the investment-to-GDP ratio was 5 percentage points higher than the EU average and in 2020 – although there is no final data yet – the ratio is estimated to be close to 30 percent. As the Hungarian Foreign Minister said in Paris in early 2021, during the pandemic, opposition parties put pressure on the government to increase social subsidies, while the government focused on preserving and protecting jobs that can generate income in the long term.
As for the results of this investment-focused development strategy, it should be emphasized that we are only in the middle of the year, but we can already see that Hungary’s economic recovery in 2021 is robust, the European Commission recently raised its GDP forecast from 5 percent to 6.2 percent, similar to how the EBRD raised its estimate from 4 percent to 5.5 percent. (See more forecasts in Table 2!) According to European Commission, EU economic output will reach pre-crisis levels by the end of 2022, while Hungarian economic output will be restored much earlier, at the end of this year.
| Table 2. Hungarian GDP forecasts, 2021 (percent) | |
| European Commission | 6.2 |
| IMF | 4.3 |
| EBRD | 5.5 |
| MNB – Central Bank of Hungary | 6.2 |
| Erste Bank | 6.9 |
| ING Bank | 7.3 |
| K&H | 6.7 |
| Takarékbank | 7.7 |
| Source: own compilation from various sources | |
[1] Varga Mihály (2021): a beruházások alapozzák meg a következő évek növekedését. Retrieved from: https://koronavirus.gov.hu/cikkek/varga-mihaly-beruhazasok-alapozzak-meg-kovetkezo-evek-novekedeset
[2] Orbán elmondta, mi kell a gazdaság újraindításához (2021): Retrieved from: https://24.hu/kozelet/2021/07/09/orban-viktor-europai-unio-magyarorszag-gazdasag-ujrainditas/#