Hungary

Originally published: Jan-24-2006

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Government

Hungary is a stable, multi-party parliamentary democracy made up of 19 counties and the capital region of Budapest. The government has three branches: executive, made up of the president (head of state), prime minister (head of government), and Council of Ministers; legislative, comprised of the National Assembly (386 members); and judicial, the Supreme Court and Constitutional Court.

Population

The estimated population in July 2005 was 10,006,835. The estimated growth rate for 2005 was -0.26%. Ethnic groups include Magyar (ethnic Hungarian) 89.9%, Romany 4%, German 2.6%, Serb 2%, Slovak 0.8%, Romanian 0.7% . The official language is Hungarian; business languages include Hungarian, English and German. Literacy is at 99.4%.

Legal System

Rule of law based on Western model. The sources of Hungarian law are the Acts of Parliament, governmental and ministerial decrees, which are valid only if published in the Official Gazette, and decrees of local governments.

The legal system of the Republic of Hungary accepts the universally recognized rules and regulations of international law, and shall harmonize the internal laws and statutes of the country with the obligations assumed under international law.

Economy

Currency: forint (HUF)

• HUF per USD: 204.21 (as of 1/24/06)
• HUF per EUR: 251.18 (as of 1/24/06)

Economic Indicators

(e) estimate (f) forecast

Comparative Economic Indicators (2002)

Source: Economist Intelligence Unit

Leading Markets (2004): Germany (34.1%), Austria (8.1%), France (5.8%), Italy (5.7%), UK (4.6%)

Leading Exports: machinery, vehicles, food, beverages, tobacco, crude materials, manufactured goods, fuels and electric energy

Leading Suppliers (2004): Germany (25.1%), Italy (7.2%), China (7.1%), Austria (6.4%), France (4.9%)

Leading Imports: machinery, vehicles, manufactured goods, fuels and electric energy, food, beverages

Top Industries: mining, metallurgy, construction materials, processed foods, textiles, chemicals (especially pharmaceuticals), motor vehicles

General Economic Situation

Hungary is a fully functioning market economy with a strong commitment to increasing foreign trade and investment. It was the first country in Central Europe to extensively privatize its state-owned industries and companies. The domestic market, though relatively small, is still the third-largest in east-central Europe, behind Poland and the Czech Republic.

Accession to the European Union on May 1, 2004 has been the most important event shaping the Hungarian economy over the last few years. Membership has bolstered the country’s political and economic stability. The European Union now accounts for close to three-quarters of exports, with Germany being the largest economic partner by far.

After a very good year in 2004, growth slowed in 2005 with domestic demand and exports weakening. Recent economic performance has been mixed. While growth has been reasonably good and inflation has started to decline, fiscal and external positions remain troublesome with the current account remaining deeply in the red. Hungary is also vulnerable to exchange rate and interest rate volatility. Sovereign debt was upgraded by rating agencies in 2000. Hungary, along with the Czech Republic, now holds the highest rating among the Central European transition economies. However, ratings agencies are concerned with Hungary’s unsustainable budget and current account deficits.

Two-thirds of Hungary’s gross domestic product (GDP) is generated in the services sector. Industry generates approximately one-fourth of GDP; agriculture, 4-5% of GDP. The private sector accounts for more than 80% of GDP.

Business Climate

Hungary has the advantage of being a relatively advanced and relatively low-cost country, that is also strategically located in central Europe. It is within the European Union customs union, and also has favorable connections to the European-wide transportation network.

An aggressive privatization policy was pursued in the mid-1990s. The result is that major portions of the telecommunications, banking, utilities and television sectors are now in private hands. Foreign direct investment has played a significant role in modernizing production and redirecting trade from east to west.

The Hungarian Constitution guarantees private ownership, right of enterprise and freedom of competition. The government engages in reasonably transparent regulation. A substantial body of laws protects foreign investment in Hungary and enables profit repatriation.

Conversion and Transfer Policies

The Hungarian forint (HUF) is convertible for essentially all business transactions. There is no difficulty in obtaining foreign exchange.

Dispute Settlement

Hungary has an independent judiciary and fairly well developed commercial law system. The legal process, however, can be quite lengthy as the system is slow and overburdened. Contracts can include sole arbitration by a foreign court. Hungary has accepted binding arbitration in cases where the resolution of disputes between foreign investors and the state is unsuccessful. The country is a member of the International Center for Settlement of Investment Disputes (ICSID) as well as a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Intellectual Property Rights

Although the government has taken steps in recent years to strengthen protection of intellectual property rights, further improvement is needed.

Political Violence

Violence is not a part of the political landscape in Hungary. The transition from communism to democracy was peaceful. There has been no violence directed against foreign-owned companies.

Corruption

Transparency International is active in Hungary and rated the country 34th out of 102 countries (1st is best) in its 2004 Corruption Perceptions Index. This ranking is higher than most other countries in the region.

Credit and Collections

• Collection Experience: Fair-Good
• Exchange Delays: 2 months
• Preferred Credit Terms: Sight draft
• Minimum Credit Terms: 30 day sight draft

Payments

Bank transfers are by far the most common payment method. Hungarian banks are connected to the SWIFT network, which provides low cost, flexible and speedy processing of domestic and international payments.

Debt Collection

It is advisable, where possible, to avoid taking legal action locally. An amicable settlement based on a payment schedule drawn up by a public notary is a good course of action. The schedule should also include an enforcement clause allowing the creditor to move directly to the enforcement stage in case of a default. It is relatively common for creditors to issue a winding up petition against the debtor to prompt a speedier reaction or payment. Commercial disputes are heard by either the local or regional courts, depending on the size of the claim.

Risk Assessment

Coface Country Risk Rating: A2 rating watchlisted with negative implications since April 2005. Default probability is still weak even though the political and economic environment, and/or the payment record of companies are not as good as A1-rated countries.

Ducroire Delcredere Political Risk Rating: 1 (Very Low)
Ducroire Delcredere Commercial Risk Rating: B (Moderate)

Sources for further information on doing business in Hungary

Doing Business in Hungary, Ernst & Young: Free report on CD or in PDF format including information on the investment climate, foreign trade, corporate taxation, etc.

Hungary Country Commercial Guide, U.S. Commercial Service: Updated in 2008, this free document provides information on political and economic environment, trade regulations and standards, etc.

Protecting Your Credit Sales in Hungary, Atradius: Brief paper (5 pages) written in November 2005 providing advice on credit safeguards, collection of receivables, etc.

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This information is provided by ABC-Amega Inc. Providing international receivable management and debt collection services for exporters to more than 200 countries including Hong Kong. For further information, contact info@abc-amega.com.

This report represents a compilation of information from a wide variety of reputable sources including: the U.S. Department of State, U.S. Commercial Service, CIA World Factbook, Federation of International Trade Associations, and Economist Country Briefings.

Risk Assessment information: Provided with permission by Coface Country Rating. Also Belgian credit insurance company Ducroire Delcredere

Information on credit terms and the probability of prompt payment are provided, with permission, from Overseas Press and Consultants (OP&C) as published in IOMA's Report on "Managing Credit, Receivables & Collections," September 2005.