Economic studies
Hungary

Hungary

Population 9.8 million
GDP 12652 US$
A3
Country risk assessment
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Synthesis

Major macro economic indicatorS

  2015 2016  2017 (e) 2018 (f)
GDP growth (%) 3.1 2.0 3.9 3.6
Inflation (yearly average) (%) 0.1 0.4 2.9 3.2
Budget balance* (% GDP) -1.6 -1.8 -2.4 -2.5
Current account balance (% GDP) 3.1 5.0 3.5 2.8
Public debt (% GDP) 74.7 74.1 72.6 71.4

*(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, and high emigration
  • Regional disparities; lack of mobility
  • Shortfalls in vocational education and training
  • Poor levels of innovation and R&D
  • Limited room for manoeuvre in terms of the budget
  • High debt level of companies, although falling
  • Fragility of the banking sector (public and private)
  • Energy dependence: 50% of needs imported; 40% from Russia alone

RISK ASSESSMENT

Consumption and investments take a lead on growth

Hungary experienced a significant contraction of investments in 2016 when, similar to other CEE countries, the economy suffered from a lower absorption of EU funds due to switching to the new European budget. However, an improvement was already seen in the first half of 2017, with a surge of fixed asset investments. These were mostly fuelled by a boost in EU co-financed projects, but other investments increased as well, including manufacturing industries (e.g. automotive, IT equipment). Further capacity upgrades are expected to be conducted.

On the consumer side, household spending continues to benefit from rising employment and higher wages. The unemployment rate dropped below 4% last year, and wages have increased, partly thanks to increases of both minimum wage and guaranteed minimum wages for skilled workers. The stimulus for wage rises comes from a tight labour market. Labour shortages have become an important constraint for many companies, particularly regarding skilled employees, with skill mismatches still present on the Hungarian labour market. An expected further tightening of labour market will trigger the ongoing rise of wages, and its pace is likely to exceed both productivity growth and Hungary’s GDP growth. Despite this, the country still benefits from lower labour costs levels than in Western Europe, and attracts foreign investments. Rising wages increase inflationary pressure and the central bank will likely become less expansive.

The increase of compensations is partly offset by the reduction of corporate tax to 9%: the lowest rate in Europe. This measure mainly benefits mid-sized Hungarian and foreign-owned companies with more than EUR 2 million in revenue. Tax rates for large foreign multinationals in Hungary, especially German carmakers, had been already heavily reduced by subsidies and tax concessions. Small firms already benefited from a lower tax rate of 10%. Exports benefit from favourable perspectives of main trade partners, and the high share of the automotive industry in total exports is expected to strengthen, thanks to further improvements in manufacturing capacities.

 

Budget deficit widens on further spending

The budget has been consolidated over last years. However, since 2015, the general government deficit increased, reaching 1.8% in 2016. On the one hand, investment expenditures decreased and revenues benefited from growth of wage-related tax receipts, but on the other, government spending increased due to capital transfers and the public wage bill. Tax cuts and a further increase of expenditures, as elections approach, made the public deficit higher: it is expected to reach 2.4% of GDP in 2017 and then 2.5% of GDP in 2018. The deficit level is subject to the pace of inflow of funds from the EU, predominantly used for infrastructure building projects and other programmes. Spending on investments could be reduced as a result of delays in implementation, therefore making the deficit lower than expected. Elections scheduled for April 2018 contribute to a higher generosity of government with rising public sector wages, increased spending on infrastructure, and expenditure on tighter border security to curb unauthorised immigration.

 

Fidesz is expected to win the next parliamentary election

Prime Minister Viktor Orbán and his conservative Fidesz-Hungarian Civic Union (Fidesz) party were re-elected for a second four-year term in the 2014 elections. Facing competition from the far right Jobbik party, in third place behind the Socialist party, Fidesz maintains a nationalist policy that includes opposition to the European Union on the dispersal of migrants. The government implemented a number of sectorial taxes, which are expected to remain in place. Fidesz has led in the latest public opinion polls (October 2017), bolstering the party’s position as the favourite to win the next parliamentary election, due in April 2018. Therefore, it is most likely that Fidesz will be elected for a third consecutive four-year term. The party has been targeting its core voter base with a fresh anti-immigrant campaign. The outlook for Fidesz has improved further with the decision of Laszlo Botka – the prime ministerial candidate of the main centre-left opposition force, the Hungarian Socialist Party (MSZP) – to withdraw his candidacy in October 2017. Jobbik remains a distant second in terms of popularity.

 

Last update : January 2018

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.

 

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%.

 

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.

 

From 2009, considering trade companies, a mediation to solve an out-of-court settlement must be held by the parties prior to commencing legal proceedings.

 

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).

 

When the debtor 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 has become mandatory for all claims up to one million Hungarian forints (HUF) – about EUR 3,400– and is conducted digitally from beginning to end as of 2010. As a result, ordinary proceedings cannot be started if the claim is purely monetary and inferior to this EUR 3,400 limit.

 

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.

 

Legal proceedings

Ordinary proceedings

In case of objection by the debtor, 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.

 

As of 2011, cases exceeding a value of HUF 400 million (approximately EUR 1.6 million) must be swiftly handled by the courts via shortened legal processes. At any stage of such proceedings and where possible, the judge may attempt to achieve conciliation between the opponents.

 

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 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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