EKONOMİ YAYINLARI
Hungary

Hungary

Population 9.8 million
GDP 16,484 US$
A4
Country risk assessment
A3
Business Climate
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Synthesis

Major macro economic indicatorS

 

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 4.3 5.1 4.8 -6.1
Inflation (yearly average, %) 2.4 2.9 3.3 3.1
Budget balance (% GDP) -2.4 -2.3 -1.9 -1.2
Current account balance (% GDP) 2.3 -0.3 -1.0 -0.7
Public debt (% GDP) 72.9 70.2 68.8 66.9

(e): Estimate. (f): Forecast.

STRENGTHS

  • Diversified economy
  • High quality infrastructures thanks to European funds
  • Integrated within the European production chain
  • Trained workforce
  • Low corporate taxation
  • Generally positive payment behaviour

WEAKNESSES

  • Ageing population, low birth rate
  • Exposed to European economic trends as a small and open economy
  • Regional disparities; lack of mobility
  • Deficiencies in vocational education
  • Poor levels of innovation and R&D, high content in imported inputs for exports
  • Limited room for manoeuvre in terms of budget
  • High debt level of companies (although falling)
  • Fragility of the banking sector (public and private)

RISK ASSESSMENT

Decelerating growth

After strong growth in 2019, the Hungarian economic activity is expected to weaken this year. Admittedly, it benefited so far from increasing public expenditures ahead of local elections, an acceleration in construction, as well as high production in the automotive sector. The latter did not even suffer last year, despite slower car sales recorded in crucial export markets. The automotive sector was able to benefit from the launch of new models in local factories and still solid demand for premium brands. Indeed, Hungary has been endowed with production plants of Audi, BMW and Mercedes. Both automotive and construction will not expand as strongly in 2020 compared to 2019. Domestic demand remains the growth driver with formidable increases of gross fixed capital formation (around 28% of GDP in 2019) and robust household consumption (48%) supported by a low unemployment rate (3.4% in August 2019). Both components will be decelerating. Public investments are expected to moderate after Hungary’s highly effective absorption of EU funds last year. Nevertheless, large investments targeted at increasing manufacturing capacities can keep dynamics relatively high. In terms of private consumption, weaker GDP growth will limit labour demand and attractive yields of retail sovereign bonds will contribute to a growing savings rate. Nevertheless, wage growth is likely to remain solid while facing ongoing labour shortages. Higher incomes support not only consumption, but also household investment increasingly. Families can benefit from the government’s support for buying homes. A stronger drag on GDP growth will come from exports that will gradually suffer from a weaker demand on the main markets. The main exports include machinery, vehicles, pharmaceuticals and minerals. New manufacturing capacities could boost foreign trade but close to year-end.

Companies in Hungary have benefited from a 9% corporate tax rate – the lowest in Europe. This measure mainly covers mid-sized Hungarian and foreign-owned companies with more than €2 million in revenue. Effective tax rates for large foreign multinationals in Hungary, especially German carmakers, had previously already been heavily reduced by subsidies and tax concessions.

 

Budget deficit on a decreasing path

The general government deficit has been decreasing since 2017. It is expected to reach 1.2% of GDP in 2020. Slower but solid economic activity will support tax revenues. On the other hand, their increase will be limited by a further cut in employees’ social security contributions. A high premium on retail bonds fuels expenditures, as the government further encourages the purchase of forint denominated sovereign bonds by households, with the help of the Hungarian Government Security Plus. The yield is very attractive (4.95% for a 5-year bond compared to the central bank’s 0.9% leading rate). Except for interest spending, current expenditure growth is expected to remain moderate and contribute to the reduction of the deficit.

Hungary’s current account balance is estimated to remain slightly negative this year. The development of the current account has been driven by the steadily growing export sales and imports related to the robust investment trend. Services’ balance has been in a surplus thanks to tourism. The primary income balance was negative due to foreign investors’ dividends.

 

Fidesz remains in power

Prime Minister Viktor Orbán and his conservative Fidesz-Hungarian Civic Union (Fidesz) party were re-elected for a third four-year term in the April 2018 elections. After a nationalist anti-immigrant campaign in opposition to the EU on the distribution of migrants, Fidesz obtained a landslide victory with two-thirds of the seats in Parliament. The election was marked by an exceptionally high turnout: 68%, the highest since 1994. This absolute majority in Parliament allows the government to push through key legislation without needing cross-party agreement, and increases its control over state institutions. In this context, relations with the European Commission will likely remain tense. The next parliamentary elections are scheduled for 2022.

In the latest municipal elections held in October 2019, the opposition recorded its best electoral result in the past decade. It won several important mayoral races, including in the capital city. Gergely Karacsony, originally from the small Dialogue for Hungary party, but backed by a wide coalition of opposition parties, was elected as mayor of Budapest. On top of a wide cooperation between opposition parties, some other factors contributed to the results. It included a controversial tape involving a major-city Fidesz mayor that mobilised opposition voters. However, the room for the opposition to demonstrate its governing skills ahead of the 2022 parliament election will be limited due to curtailed powers of local governments.

 

Last update : May 2020

Payment

Bills of exchange and cheques are not commonly used since their validity depends on compliance with several formal issuing requirements. Nevertheless, both forms of payment, when dishonoured or duly protested, allow creditors recourse to a summary procedure to obtain an injunction to pay.

The promissory note “in blanco” (üres átruházás, a blank promissory note) – which constitute an incomplete payment deed when issued – is not widely used in Hungary. This is because it qualifies as a negotiable document (securities), which may be transferred by endorsement plus transfer of possession of the document (subsequent to a blank endorsement, only delivery is needed).

Bank transfers are by far the most common payment method. After successive phases of privatisation and concentration, the main Hungarian banks are now connected to the SWIFT network, which provides low cost, flexible, and speedy processing of domestic and international payments. Furthermore, SEPA transfers are also a popular mean of payment because of the developing banking network.

Debt collection

Amicable phase

Where possible, it is advisable to avoid taking legal action locally due to the formalism of legal procedures and rather lengthy court proceedings: it takes one to two years to obtain a writ of execution. It is advisable to seek an amicable settlement based on a payment schedule drawn up by a public notary, who includes an enforcement clause that allows creditors, in case of default by the debtor, to proceed directly to the enforcement stage; subject to acknowledgement by the court of the payment agreement’s binding nature.

Since 2014, interest is due from the day after the payment date stipulated in the commercial contract and, unless otherwise agreed by the parties, the applicable rate will be the base rate of the issuer in force on the first day of the reference half-year period, plus 8%. Since 2009, as far as commercial companies are concerned, before initiating legal proceedings, the parties are obliged to resort to mediation in order to resolve the dispute out of court.

 

Injunction of payment and European Injunction of Payment

When in possession of a due and payable debt instrument (acknowledgement of debt, unpaid bill of exchange, dishonoured cheque, etc.), creditors may obtain an injunction to pay (fizetési meghagyás), using a pre-printed form. This more efficient and less expensive summary procedure now allows the notary – if he considers the petition justified – to grant an injunction, without hearing the defendant. The defendant is then instructed to pay both the principal and legal costs within fifteen days of the serving of the ruling (or within three days for an unpaid bill of exchange). This type of legal action has become mandatory for all claims under HUF 3 million and optional under HUG 30 million (about €9.50-95.000)

When the debtor seats or has assets in other European Union (EU) member states, a European Payment Order procedure facilitating the recovery of undisputed debts may be triggered. This type of legal action is conducted digitally from beginning to end as of 2010..

Since 2010, the injunction to pay is carried out by public notaries in order to reduce the workload of the courts. Although not mandatory, the presence of a lawyer is advisable for this type of procedure.

If the creditor has no Hungarian address, this procedure is not available.

 

Legal proceedings

Ordinary proceedings

In case of objection by the debtor, or if there is no Hungarian address, or if the claim is more than €95,000, the case is treated as a dispute and transferred to ordinary court proceedings. The parties will then be summoned to one or more hearings to plead their respective cases. Ordinary proceedings are partly in writing – with the parties or their attorneys filing submissions accompanied by all supporting case documents (original or certified copies) – and partly oral, with the litigants and their witnesses presenting their cases during the main hearing.

Since 2011, cases involving an amount of more than HUF 400 million (approximately EUR 1.6 million) must be dealt with quickly by the courts by means of a shortened procedure. At any point in this procedure and subject to feasibility, the judge is entitled to make an attempt at conciliation between the parties.

It is relatively common practice to immediately issue a winding up petition against the debtor so as to prompt a speedier reaction or payment. This practice was sanctioned by the 2007 amendment to the Hungarian bankruptcy law, which authorised creditors to issue a winding up petition against a debtor only in they received no response nor payment from the debtor within 20 days of sending a formal notice. In practice, however, it is simple to request the liquidation of a debtor, and creditors regularly use this as a tool in the negotiation process.

Commercial disputes are heard either by the district courts (járásbíróság), set up in commercial chambers, or by legal tribunals (törvényszék), depending on the size of the claim. Payment claims up to HUF 30 million belong to district courts on first instance; above this rate, regional courts are the first instance for these cases. Insolvency procedures and enforcement belong to regional courts at first instance by default.

Enforcement of a court decision

When all appeal venues have been exhausted, a domestic judgment becomes enforceable. It the debtor fails to satisfy the judgment, the creditor can either request an enforcement order from the court, or for a specific performance (payment) through a bailiff, who will implement the different measures necessary to enforce compliance (from seizure of bank accounts to foreclosing real estate).

Regarding foreign decisions, those rendered in an EU country will benefit from special enforcement conditions such as the European Enforcement Order when the claim is undisputed. Nevertheless, for decisions rendered in a non-EU country, Hungarian law provides for a reciprocity principle: the issuing country must be part of a bilateral or multilateral agreement with Hungary.

Insolvency proceedings

Out-of-court proceedings

Even though Hungarian law does not provide formal out-of-court proceedings, private and informal negotiations are held between creditors and debtors in order to avoid judicial insolvency proceedings. This constitutes a practical approach in order to avoid liquidation. If an agreement is reached, they can request the suspension of a judicial proceeding until the agreement is respected.

 

Restructuring the debt

Under Hungarian law, restructuring is not formally regulated, even though the Hungarian Bankruptcy Act regulates all insolvency processes, including specific deadlines, legal requirements, and rights and obligations for participants. Instead, both bankruptcy and liquidation proceedings offer a debtor company a chance of survival by restructuring its debt in a composition agreement in a ninety-day stay. It is extremely rare to conclude a liquidation process with a surviving company, as the aim of the proceedings is by nature not one of restructuring. From this point onwards, the acts of the debtor are overseen by an administrator. The reorganization agreement must be validated by a majority of creditors and the court must also approve the plan. If a compromise is not reached, the court will terminate the proceedings and declare the debtor insolvent.

 

Liquidation

Proceedings may be initiated upon demand of either the debtor or the creditor, and a liquidator is subsequently appointed. Creditors must lodge their claim and pay the fees within 40 days of the commencement of the proceedings in order to be listed in the table of creditors and consequently receive a part of the proceeds. The liquidator will then assess the debtor’s economic situation together with the claims, and then provide the court with recommendations on how the assets should be distributed. All insolvency procedures are validated by court, but there are very few checks in place that prevent creditors from liquidating their companies, which makes it a very easy and common practice for failed businesses, hence the relatively high number of insolvencies in Hungary.

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