Economy

Hungary is a land-locked country in the heart of Europe. Blessed with extensive low-lying, fertile plains, the countrys economy prior to World War II was primarily oriented toward agriculture and small-scale manufacturing. Hungary’s strategic position in Europe and its relative lack of natural resources have also dictated a traditional reliance on foreign trade.

In 1968, Hungary was the first country in Central and Eastern Europe to initiate political and economic reforms by introducing the “New Economic Mechanism”. By the late 1980s and early 1990s, fundamental laws on the banking system, foreign investments, the foundation of companies, trade, competition, labour, intellectual property and bankruptcy were laid down, while imports, prices and wages were liberalised.

Hungary was the first country in the region to launch market-based privatisation, including in strategic sectors such as energy and banking, and public sector reform of health and education. As a result, the number of foreign direct investments increased rapidly.

In 1996, the Hungarian currency became convertible and Hungary joined the OECD. By the end of the 1990s, the privatisation process was essentially complete. Less than 20% of state assets – mainly in strategic industries – remained in government control and Hungary was ready to join the European Union in May 2004.

Foreign ownership of and investment in Hungarian firms are widespread, with cumulative foreign direct investment totalling more than EUR 60 billion (USD 80 billion) since 1989. Foreign capital is attracted by skilled and relatively inexpensive labour, tax incentives, modern infrastructure and a good telecommunications system.

GDP growth in Hungary was driven by the expansion of exports and investments. Between 2001 and 2008, export growth was exceptionally high at 11.5% per annum and the structure of exports showed an upward trend. After 1998, the share of technology-intensive and high-value-added sectors such as machinery, transportation equipment and ICT products grew significantly.

From 2006, Hungary’s economic development had slowed and GDP growth remained below 4% as fiscal consolidation became the focus of economic policy. The government’s austerity programme has reduced Hungary’s large budget deficit, but reforms have dampened domestic consumption, slowing GDP growth to less than 2% in 2007 and 0.6% in 2008.

Global Crisis

Hungary is an open, export-driven economy. As a consequence, the global slowdown and faltering demand in its main export markets has had a negative impact on economic growth, especially in the export-orientated automotive and consumer electronics sectors.

In 2009, the Hungarian economy shrank by 6.3%. This was attributable to three factors: the slump in agricultural output following the sector’s outstanding growth in 2008; the increasingly rapid decline in other sectors that began as early as 2008, and, finally, the continuing downturn in the construction sector that began two years ago (although at that stage, it was limited to only 5%).

Much like the rest of the EU, the Hungarian economy is certain to stagnate in 2010. Industry will be the fastest expanding sector with around 3.5% output growth. As a consequence of excess supply of labour, gross earnings will only increase slightly by 1%, but net earnings will be bolstered by a reduction in income tax rates. If the current account surplus is as expected, the overall government deficit is likely to amount to between 4% and 5% of GDP - depending also on the economic policies pursued by the new government.

By the end of 2009, the financial crisis in Hungary had been brought under control and a gradual recovery could be observed. In Q3 2009, Standard & Poors upgraded Hungarys credit rating to stable from negative, “in a sign that one of the countries hit hardest by the financial crisis may be on the mend”.