Hungary after the elections

09 April 2014

Foreign companies operating in Hungary will have to rethink their short- to medium-run strategy. A comment by Sándor Richter

Viktor Orbán; photo © European People's Party

Following the clear victory of the right-wing populist Fidesz party led by Viktor Orbán in the Hungarian general election held on April 6th, the new-old government will most probably continue its ‘unorthodox’ economic policy. This would allow for only moderate economic growth in the coming years. The bleak growth outlook and the probable continued unpredictability in terms of governance that has hampered progress over the last four years will compel foreign companies operating in Hungary to rethink their short- to medium-run strategy.

Principally there are two options available for foreign companies: accommodation of the specific Hungarian conditions or leaving the country.

The first option will have to reckon with the continued unpredictability of the legal environment and taxation rules, and the possibility of becoming a target of hostile rhetoric and actions by the government. This latter outcome may include frequent and not necessarily benevolent control by the tax authorities. Firms operating in the manufacturing industry and primarily specialized in exports have less reason for concern than other businesses, as the presence of foreign owned businesses in the productive sector is welcomed by PM Orbán’s regime. In the services sector, especially in the case of utilities, foreign firms are at best tolerated. PM Orbán has also declared his intention to reshuffle the financial sector to achieve up to 50% Hungarian ownership, much higher than the current 20% share.

The second option, leaving the country, is certainly a painful and costly decision in most cases. Potential buyers for businesses are rare, prices of property are depressed, and the effort over many years to set up a successful business would prove to be wasted.

Nevertheless, reconciliation of the government with foreign businesses, especially with those operating in the financial sector, could be a key factor in enhancing investment, the driving force of sustainable economic growth. The window of opportunity for such a turn is theoretically open now. With the elections over, and no immediate further need for brutal ‘anti-multi’ and ‘anti-bank’ propaganda, a policy turn would actually be possible. However practical considerations work against such a change. Phasing out of the sector specific taxes would necessitate the creation of other revenues for the recently consolidated budget. This would require the withdrawal of the flat-rate income tax plus genuine reforms in public finances, both extremely unpopular for the Fidesz clientele. Not forgetting that Mr. Orbán will also want to win the next election in 2018…