When the former communist countries in Central and Eastern Europe joined the EU almost 15 years ago, many in Western Europe feared that the new entrants would have represented a burden on their taxpayers’ money; yet, the Eastern European countries kept growing, and still nowadays they represent an engine of growth for the whole of the EU.
In this article, we will talk about the five opportunities and the five risks of doing business in one of these countries: Hungary.
First opportunity: EU membership
The first opportunity in Hungary is being part of the EU. This country, as for the others in Central and Eastern Europe, is a great source of growth for the EU, with its growth averaging more than 3% during the past five years, well above the EU average. However, being part of the EU is also a source of opportunity for Hungary for two reasons.
The first one is that if you are planning to export to Hungary or you are planning to set up a manufacturing plant in Hungary you have access to the whole EU market. You do not have to set different standards for your products or services; this is a great advantage for such a small country as Hungary.
The second one is that Hungary receives a lot of money from the EU in EU-funding. Just in 2016 the country received 4.55 billion euros, roughly 5 billion US dollars. Just to give an idea of how much this money propels growth in Hungary, consider that it represents around 1.7% of Hungary’s GDP at purchasing power parity (PPP), but if we consider the GDP at official exchange rates, then this number grows to 3.7%. This represents a major engine for the growth of this country.
Source: European Commission
Second opportunity: attractive middle-income market
The second opportunity is the market: Hungary is a country of 10 million people with a GDP per capita at purchasing power parity of 30,000 US dollars. This means that we are talking about a medium-sized middle-income market where most of the B2C products can be sold. I am referring to the sales in FMCG, such as food products and personal care.
This country has been growing, as I wrote before, at more than 3% per year during the past five years, outpacing the EU.
Source: World Bank
Third opportunity: flexible but stable currency
The third opportunity is the currency. Hungary is a member of the EU, but it is not a euro member. This means that the country has some sort of flexibility in setting the value of its currency, which has nevertheless been quite steady during the past years; it has slightly depreciated towards the euro but we think that for a country like Hungary, that is seen as a manufacturing hub, such a controlled depreciation is good for the country as long as the depreciation is kept under control. Of course, if there was a huge devaluation, that would be detrimental for the country, but in the current way the country has some flexibility to play with the exchange rate, so on balance we think this is a pros.
Of course, if there was a huge devaluation, that would be detrimental for the country, but in the current way the country has some flexibility to play with the exchange rate, so on balance we think this is a pros.
Source: Trading Economics
Fourth opportunity: good infrastructure
The fourth reason is the quality of the infrastructure. I was personally in Hungary a couple of years ago, I traveled there by car and I can tell you, the average quality of the roads even in the province is good; especially in the capital city Budapest there is a great airport, and a large subway network. Overall, the infrastructure in Budapest is good, as per the overall quality in the country.
Fifth opportunity: business-friendly tax system
The fifth opportunity in Hungary is its tax environment as an investment hub. The country has the lowest corporate income tax in the EU at 9%. The tax on employees is flat so you will have a 15% personal income tax.
This can be an incentive to attract people to work in Hungary and to reduce the tax burden on employers.
First risk: dependency on EU-funding
The risks of doing business in Hungary are all drawbacks of the opportunities.
The first one is the dependency on EU funding. We wrote before that the country in 2016 received 4.5 billion euros in funding, but it contributed only for 900 million euros. This gap of more than 3.5 billion euros means that for a large part Hungary is dependent on EU funding; if there is some sort of cut in funding because of violation of EU rules or because of something else happening, it would have a meaningful negative effect on the economy.
Second risk: high level of corruption
The second risk is the level of corruption.
For a country that depicts itself as an investment hub, being perceived as the second most corrupted country in the EU only after Bulgaria does not look very well for people that want to invest; globally, it ranks 66 out to 180 countries. This puts Hungary quite far away from the center of Europe.
Source: Transparency International
Third risk: dependency on Germany
The third risk is the dependency on Germany.
Germany is the largest economy in Europe, is a large country, therefore it is normal for any small country in Europe to be dependent on Germany; for example, it is also the case for a wealthy country such as the Netherlands. But in the case of the Netherlands, Germany is the main export market; the issue with Hungary is that the growth of this country has been powered from the public and private sector. From the public sector, most of the money has come from the EU, but from the private sector, most of the investments have come from German companies relocating to Hungary.
Therefore, in the case of Hungary, Germany is not only the main export market but also the main source of investments into its private sector.
Source: Hungarian National Bank
Fourth risk: shrinking population
The fourth risk is that the population in Hungary is slightly but constantly decreasing: the median age is 43 years old and what is worse is that younger people, skilled younger people, are leaving the country in search for a better salary elsewhere in Europe. This is what is usually called brain drain; not only this phenomenon has a negative effect on the domestic market as a whole, because the population shrinks, but also because these are the most productive people that should proper the growth of the in the country and instead they are making someone else rich.
Source: The Economist
Fifth risk: tax system hampering consumption
The fifth risk is the downside, I will say the flip side of the fiscal environment in Hungary. We wrote, it has the lowest corporate income tax in Europe, it has a low, flat personal income tax; great. However, it has the highest VAT in Europe at 27%, so if you are looking at Hungary as an investment hub receiving foreign income it works perfectly because you are taking advantage of the 9% income tax. But if you are thinking about Hungary as an export market, the 27% VAT rate could make the market less attractive.
The other issue is that, even if the personal income tax is set at a flat 15%, there are other challenges especially on the employer’ side, like pensions, healthcare, social security contributions and other things. In the end, in relative terms, Hungary has the seventh biggest total employment cost in Europe, which means that for every euro net that the employee gets, the employer has to pay 1 euro and 82 cents.
Source: Institut Économique Molinari
However, given the the low level of salaries averaging roughly 1,000 euros per month, the total cost of the workforce is still low, the fifth lowest in the EU. Yet, consider that salaries have been growing rapidly since 2012; they increased roughly by 50%.
This was our general analysis of Hungary, if you had the opportunity to do business in Hungary and maybe you found out new opportunities that we did not mention, or if you think that there are more risks to take into account when doing business in this country, please write them in the section below in the comments.
Overall, we think that Hungary is an attractive market, it is a great place as an investment hub considering its nice tax environment. However, there are risks associated with the level of corruption, the decreasing population, the dependency on some large countries in Europe and the flip side of its tax environment.
Find other information about Hungary in Country Data page: Hungary
In you are interested in doing business in Hungary, try out our platform to find Hungarian companies.