Report: Hungary’s economy gathers pace

Earlier this year, Dentons and DLA Piper joined Linklaters in announcing the launch of low-cost service centres in Poland. However, fellow CEE nation Hungary has not yet been singled out as a possible relocation point owing to its slower economic growth and fewer investment opportunities.

Screen Shot 2016-07-01 at 15.12.27However, Hungary is vying to catch up with its CEE neighbours, working to improve market conditions in the country, and last year was a record one for investment.

Q: How does Hungary’s economic climate compare with other CEE countries?

Andrea Jádi Németh, managing partner, bpv Jádi Németh: The first months of this year brought slower growth in the whole region, with the only exception being Romania.

Both the GDP and volume of investment dropped in Hungary, resulting mainly from declining and delayed EU fund payments and the weak performance of the car manufacturing industry, which is the backbone of the Hungarian economy.

According to the Hungarian government, this decline is just transitional and for the rest of the year the whole of the region can expect to see solid growth. Hungary is expected to stay in the mid-range, yet Romania and Poland will be able to outperform their neighbours thanks to their fiscal relaxation policies.

Péter Berethalmi, managing partner, Nagy és Trócsányi Ügyvédi Iroda: As in other CEE countries, Hungary’s economy is characterised by a contraction in early 2016. The country experienced the weakest GDP expansion in three years, which was partly due to the slower disbursement of EU structural funds in the beginning of the new funding cycle in the CEE region. Another factor was the lower output of motor vehicle manufacturers due to production breaks in winter.

Nevertheless, the lower growth is transitory and economic activity is expected to pick up during the course of the year and into 2017.

Andras Szecskay, managing partner, Szecskay Attorneys at Law: Domestically, the Hungarian economy has grown well in recent years, aided by strong exports and consistent domestic demand. In 2015, the economy was estimated to have grown by 2.7 per cent.

Andrea Jádi Németh
Andrea Jádi Németh

“According to the Hungarian government the weak performance is just transitional but for the rest of the year we can expect solid growth for the whole region”

After a deep double-dip recession, a steady recovery started in early 2013. The rebound was aided by a recovery in Europe and a strong increase in EU-funded investment. More recently, economic growth has been fuelled by net exports supported by improved cost competitiveness and by private consumption.

Despite this, and steady growth in the past three years that has seen Hungary recover the losses of the double dip recession, the economy still lags behind the best performers among its regional peers, such as Poland.

Q: Has in-bound and out-bound investment in the country increased over the past year? What is hindering further growth?

Berethalmi: According to data published by the National Bank of Hungary, foreign direct investment (FDI) amounted to €1bn (£831m) in 2015. However, it should be taken into account that individual transactions substantially reduced the value of the FDI inflow into the country. The state’s acquisition of Budapest Bank reduced FDI substantially by around €600m.

Total FDI stock invested in Hungary at the end of 2015 amounted to €840m, which is 77.6 per cent of the annual GDP. According to governmental sources, 2015 was a record year for investment. The Hungarian Investment Promotion Agency successfully negotiated 67 investment projects, which is a 21 per cent rise on the previous year.

Jádi Németh: In 2015 we experienced a very active year in terms of inbound investment. In fact it was a record year with double-digit growth reached in terms of agreements on projects, which led to more than a 20 per cent increase in job creation. This resulted in Hungary making it onto the list of top 10 countries by job creation, which stemmed mainly from the automotive sector and increasing ­number of shared service centres.

Andras Szecskay
Andras Szecskay

“It is expected that interest in Hungarian assets will further increase in 2016, with large platforms and landmark buildings being acquired”

On the other hand a shortage of skilled labour, as well as of blue-collar workers, is threatening some of the industries. The unmet demand for skilled labour in the information technology sector, which could be the engine of a sustainable development, seem to be the key challenges in conjunction with the need for a more stable regulatory environment and eased tax burdens.

Szecskay: In-bound EU funding has had a large effect on the Hungarian economy. In 2013, gross fixed capital formation started to grow again due to investments stemming from accelerated ab­sorption of EU funds, mostly in the public sector.

In 2014 the pattern continued and the growth of gross fixed capital formation was an outstanding 11.2 per cent on year-on-year terms. This meant that the investment ratio swelled to 21.7 per cent of GDP in 2014. However, the EU Commission’s current forecast predicts a small decrease of the ratio in 2015 and a significant drop in 2016 before funds from the new programming period of EU funding start to positively affect investment again in 2017.

According to an OECD report, certain structural reforms are needed to maintain overall growth over the medium-term and to strengthen business investment. To this end, the recently announced growth-supporting programme and a new central bank-sponsored market-based lending scheme will help promote a more organic and stable investment growth in the private sector.

Q: What areas are seeing the most transactional activity?

Berethalmi: The Hungarian M&A market experienced a significant expansion in 2015 and the number of closed transactions grew by almost 1.5 per cent compared with last year. Similarly to the whole CEE region, the most active target industry was the IT sector in Hungary, with 23 per cent of all deals being concluded in the region. Following this is the energy sector with 11 per cent of the deals, while the third most appealing investment target was media and telecommunication.

Péter Berethalmi
Péter Berethalmi

“Hungary’s lower growth is transitory and economic activity is expected to pick up during the course of the year and into 2017”

In Hungary – similar to Bulgaria and Serbia – the transaction market is characterised mainly by domestic transactions where buyer and target companies originated from the same country. The majority of the transactions were closed by strategic investors in the whole CEE region.

Szecskay: The transactional activity in the real estate market is increasing again and the purchase price per square metre is again around or even above the prices before the crisis. In fact, the annual transactional volume amounted to around €790m, the highest volume since the peak of the market in 2007. Closely linked with this is the construction industry, which is also recovering towards pre-2008 levels.

It is expected that interest in Hungarian assets will further increase in 2016, with large platforms and landmark buildings being acquired. Secondary debt trading will remain an essential part of the activity in 2016.

Jádi Németh: M&A still makes up a large proportion of the transactions, which is also true for the bigger countries of the region. Hungarian real estate instructions and developments are also generating higher demand for transactional matters. Furthermore we can still experience a relatively dynamic market in the banking and finance sector not only in Hungary but also in Slovenia and Slovakia. Apart from these, the number of government-driven transactions have also remained high in Hungary.

Q: A number of law firms are moving their back offices to Poland. Could this become a trend in Hungary and why/why not?

Jádi Németh: Apparently Poland is still the most attractive country and largest market in the region – foreign as well as domestic investment has remained high. Regional cities as well as the capital seem to attract international companies that want to outsource their back-office operations.

With a stable economy, great infrastructure and an attractive real estate market, it is clear that back-office operations and shared services are booming in Hungary, which is a general trend across all sectors. It has a central location in Europe plus tax incentives for international companies.

Berethalmi: I do not see that Hungary following in Poland’s footsteps as a trend yet, although there are many service centres placed in Hungary by non-law firm companies. With Brexit, all these trends may change again. Nevertheless, it would be great to see UK law firms moving their back-offices to Hungary.