Hungary: Hungary like the wolf
26 June 2011 | By Joanne Harris
1 July 2013
12 March 2014
7 March 2014
New legislation presents challenges to investors as the Hungarian government advances its ‘unorthodox’ political agenda
6 January 2014
23 December 2013
Hungary’s governing coalition is baring its fangs and lawyers believe its bold reforms will encourage investment in the longer term.
Like many countries in Eastern Europe, Hungary has undergone significant political reform recently. The country’s 2010 elections saw a landslide victory for right-wing party Fidesz, which now governs in coalition with the Christian Democratic People’s Party (Kereszténydemokrata Néppárt, or KDNP).
The government has since been using its two-thirds majority to bring about a whole range of legislative reforms, most recently and significantly a new constitution.
“It’s important for outsiders to understand the perspective of the leaders of Fidesz and what they believe their mandate is,” says David Dederick, managing partner at Weil Gotshal & Manges’ Budapest office. “They believe that Hungary never really underwent the fundamental revolution that many countries in the region did, for reasons specific to Hungary.”
Dederick says the constitution reflects the outlook of the party, being in many ways an intensely patriotic document enshrining the sovereignity of Hungary. Although it will not affect corporate lawyers directly, the constitution naturally has an impact on many aspects of life in the country. It has already acquired an element of folklore, having been partially composed on an iPad by politician Jozsef Szajer, according to a blog Szajer posted earlier this year.
Key elements include a stipulation that national debt, as a proportion of GDP, should not exceed 50 per cent. Currently debt stands at around 80 per cent, so Hungary’s government has a lot of work to do on this front.
The constitution also enshrines the Hungarian Forint (HUF) as the national currency. Like the rest of the constitution, changing this would require a two-thirds majority, thus making it difficult for Hungary to join the eurozone in the future.
Lawyers are keeping an eye on the constitution and the ensuing legislation that is likely to come from it. The constitution comes into force in January 2012 and many of its articles will be followed by amendments to Hungary’s laws.
However, lawyers in corporate practices are not worried.
“In my opinion the constitution won’t affect business at all,” says András Szecskay, managing partner at Szecskay Attorneys. “There may be some emotional reaction, definitely not by foreigners or investors but by people living in Hungary. The country could have lived for quite a while without having a new constitution, so it wasn’t on the urgent list, so to say.”
But that does not mean commercial law firms can ignore the government’s plans.
“The government’s giving us lawyers a lot of work at the moment and over the next two to three years,” notes Kinga Hetényi, who heads Schoenherr’s Hungarian office. She points to reforms such as amendments to the Civil and Labour Codes.
The Civil Code reforms have been going on since the previous government, says CMS Cameron McKenna Hungary managing partner Gabriella Ormai. The code was amended but not enacted and the Fidesz government has since amended it again.
This means, says Ormai, that lawyers need to keep on their toes and stay up-to-date with any changes.
“We have a lot to do and this isn’t all bad for us, because we have to explain to our clients what changes they have to pay attention to,” says Ormai.
Slash and earn
As well as implementing legislative changes, Hungary’s government has also tabled several programmes to kick-start economic recovery and slash the country’s deficit.
The first of these - the Széll Kálmán Plan, or structural reform programme - is named after Kálmán Széll, who was the country’s prime minister at the beginning of the 20th century. The programme proposes a number of significant reforms designed to reduce public debt.
The plan will cut spending on pensions and welfare, while freezing public sector pay rises and banking and ’crisis’ taxes. If it is implemented the Hungarian economy in 2014 will look very different, with significantly higher public reserves, far less spending on employment and adjustments to spending on education and pensions.
The plan is a bold move and one that lawyers think should help stabilise the country’s economy and make it more attractive to investors in the longer term.
“The type of corrective measures that there are are generally welcome,” Dederick reveals. “You have to put this into the context of where Hungary was, particularly during the crisis. Hungary was one of the first countries to have to be rescued with help from the IMF and the EU. There were some questions about what the government could do and whether it would be able to take politically unpopular steps.”
Tamás Szabó, managing partner at Szabó Kelemen & Partners, agrees that the reforms are needed.
“The most important thing is that Hungary should avoid a financial crisis such as Greece, Ireland and Portugal have had,” Szabó emphasises. “The government’s quite tough and I think Hungary has a good chance of avoiding the sort of trouble these countries are in. It’s important for Hungary to gain the confidence of international investors and this will be important for our legal profession too.”
A less drastic plan, which involves putting money into a sector rather than taking it away, is the Széchenyi Plan. This is also named after a famous Hungarian - Count István Széchenyi, who, according to Szecskay, was himself a great reformer.
The Széchenyi Plan focuses on small and medium-sized enterprises, seeking to create a million jobs in the next 10 years with an injection of HUF1tr (£3.3bn) into the sector over the next two years. The plan will particularly benefit business development, health tourism, the green economy, innovation and science, transport development and new homes.
Many of the companies that will benefit are in innovative sectors such as technology, lawyers report. While welcoming the plan, they say it is unlikely to make much difference to dealflow in Hungary. This remains sluggish, as international investors, and in particular financial institutions, have been put off by the so-called crisis tax, imposed first on the banking sector and later the energy, retail and telecoms industries. These taxes, worth HUF348bn over three years, form part of Fidesz’s austerity measures, but they have not been popular.
“Of course, this time is quite difficult for foreign companies in particular with regard to the extra taxes imposed on them,” muses ENWC Hungary managing partner Orsolya Bánki.
Despite this, projects are making an appearance.
“We have a number of greenfield investments that were put on hold during the crisis, but now we see companies picking up their original plans,” reports Bánki, adding that these projects are mainly in the retail sector.
As in many other countries across Europe, energy work is also on the increase, and several firms cite the automotive industry as a source of instructions. Meanwhile, litigation, restructuring and insolvency teams continue to be busy off the back of the financial crisis.
The general lack of activity means that the legal market itself in Hungary has been fairly stable over the past year. After the withdrawal of a number of international firms in 2007-08 there has been little change - no more departures and no arrivals.
Csilla Andrékó, managing partner at Kinstellar in Budapest, says most firms are sourcing and carrying out work across the region rather than just in Hungary. Austrian firms such as Wolf Theiss, Schoenherr and ENWC are benefiting from historical links between Austria and Germany, as investors from these jurisdictions display more confidence in Hungary.
One international firm, Gide Loyrette Nouel, has centralised its Eastern European work in Hungary after closing other regional offices last year. Budapest managing partner François d’Ornano says clients have responded well to the model of having one office “for many little countries in the region”.
According to d’Ornano, around a third of Gide’s Budapest clients are international and there is still some reliance on the firm’s “natural” French client base. He believes there is a place in the Hungarian market for firms such as Gide.
“We took the decision to maintain our presence in the region,” d’Ornano says. “We’re going to invest again in the strengthening of our presence. Our region needs an international law firm.”
However, local firms are displaying confidence.
“When these changes happened we didn’t expect the market to change dramatically,” says Nagy és Trócsányi managing partner Péter Berethalmi. “My experience is that the independent firms were more successful during the recession.”
Others agree that smaller firms are popular with a more fickle client base.
“Clients are cost-sensitive, I have to say, and they tend to switch from the big law firms to medium-sized law firms for cost-saving reasons,” explains Schoenherr’s Hetényi.
The recruitment market for lawyers in Hungary is good, but some express concern about the quality and commitment of young associates.
“We were surprised that quite a few students applied for jobs at our firm,” Berethalmi reveals, adding that there has been a change of attitude among young Hungarian lawyers. “Among students there’s a belief that firms don’t really want to recruit. It seems to us that there’s not much going on in terms of recruitment, but there’s also a tendency for young associates not to want their career to be as fast as, say, 10 or 15 years ago. They don’t necessarily imagine their lives in a big firm.”
For Schoenherr the need to find associates with the right language skills is proving difficult, although Hetényi sees no shortage of bodies.
“In the past couple of years many law faculties have opened in Hungary, so there’s quite a good production, but in the area where we work recruiting people who have good language skills is difficult,” she admits.
It may take some time still, but lawyers think the bold moves of the government will encourage investors - and therefore transactions - back to Hungary. Firms are likely to have to keep moving to stay on top of the regulations being introduced, but doing so will pay off as capital returns to this part of Europe.