Investing in Hungary

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Shai Bronshtein

Hungary had the 4th highest level of GDP growth in the world between 1998 and 2002.^[1] Hungary was the original outsourcing location for Western European manufacturers, and as of 2006 had the highest level of productivity in Eastern Europe in terms of purchasing power parity. ^[2] This means that Hungarian workers were creating the most value of any group in Eastern Europe. However, while Hungary has over the past 15 years been one of the best Eastern European countries to invest in, its growth is slowing dramatically; in 2007, real GDP grew only 1.3%.^[3]

Some of the major industries in Hungary include mining, metallurgy, construction materials, processed foods, textiles, chemicals, especially pharmaceuticals, and motor vehicle production^[4]. One of the most important industries is automobile manufacturing, and in 2005 the automobile industry was estimated to be worth EUR 8 billion by the Association of Hungarian Automotive Industries.^[5] Additionally, Hungary is one of the world's leading producers of information technology equipment with exports of more than $19 billion in 2006.^[6] This places Hungary behind only giants such as the US, China, France and a select few others that produce more in IT equipment each year.

Hungary has a highly educated workforce where nearly 70% of college-age individuals are enrolled in tertiary school^[7]. Additionally, Hungary’s is rated at a 4.2 out of 5 on the World Bank’s governance scale, meaning it is the most stable and least corrupt government in Eastern Europe.^[8]

At least 45 of the world’s largest 50 companies had a presence in Hungary, with many, such as General Electric investing more than $1 billion.^[9]. The market saturation of foreign companies coupled with some of the highest wages in Eastern Europe has led to declining, growth of the Hungarian economy .^[10]

Major Publicly Traded Companies

Energy and Resources

• MOL Magyar Olaj- és Gázipari Nyrt., Hungarian Oil and aotand Gas Public Limited Company, is a large oil products company based in Budapest. The company has operations at all levels of production, including exploration and production, refining and marketing, natural gas, and petrochemicals. H1 2008 profits were $904 million^[11].

• PannErgy Nyrt produces heat energy and electricity from geothermal energy in Hungary and other countries in which it has subsidiaries.

Banking

• FHB Mortgage Bank, as the name implies, provides mortgage-based banking services in Hungary. These include home equity mortgage loans, housing loans, commercial real estate financing loans, and land development loans among others.^[12] FHB was the largest mortgage re-financer in Hungary in 2007.

• OTP Bank was, as of the end of 2007, the largest bank in Hungary with net income of 187 billion HUF^[13]. In 2007, OTP had just under $16 billion in assets. ^[14]

Telecommunications

• Magyar Telekom Plc. is a subsidiary of Deutsche Telekom, and only 40% of the company is publicly traded. It is one of the largest providers of fixed-line telecommunications in Hungary with 2.5 million fixed lines and 4.9 mobile customers at the end of 2007^[15].

Manufacturing

• Linamar Hungary works in manufacturing components for the automotive industry, which comprises 65% of sales, as well as production of general machinery and agricultural equipment.^[16]

• Tiszai Vegyi Kombinat produces chemical products and polyolefin and provides raw materials to companies involved in plastics manufacturing.

Information Technology

• Állami Nyomda (or State Printing House Plc.) was originally a state-owned printing operation, but with the privatization of the Hungarian economy, it became privately owned and in 2005 was listed on the Budapest Stock Exchange. The company today produces secure documents and products such as stamps, secure ink and anti-counterfeiting measures, ID cards, driving licenses, etc.

Retail

• CBA is a major supermarket chain based in Hungary with more than 5000 stores all over Eastern Europe, including in Croatia, Poland, Lithuania, and Romania among others.

• Zwack produces alcoholic beverages for the Hungarian and international markets.

Foreign Companies Invested in Hungary

• Deutsche Telekom AG (DT) has around 5 million Hungarian customers through its subsidiary Magyar Telekom.^[17] Hungary’s population is just under 10 million, so that means nearly half the population are customers.

• General Electric Company (GE) employs more than 15,000 Hungarians and has more than $1 billion invested in 13 factories producing products from GE’s healthcare, industrial, and infrastructure practices^[18]

• Audi AG has manufacturing plants in Hungary, and as of 2005 the total worth of Audi’s production in the country was estimated at EUR 4 billion ^[19]

• Telenor ASA (TELN) is the second largest mobile operator in Hungary through its subsidiary Pannon. It had 3.4 million subscribers at the end of the first quarter 2008, and is continuously expanding its network.^[20]

• Vodafone AirTouch Public Limited Company (VOD) has wireless and internet networks in Hungary and is the 5th largest foreign investor with $850 million in direct investment as of the end of 2007.

• E.ON AG (EON) is a major energy company in Hungary with an investment of just under $800 million

• Alcoa (AA) has aluminum production facilities in Hungary as well as distribution, and its investments total $400 million ^[21]

• Suzuki Motor (SZKMF) has car manufacturing plants in Hungary, and as of 2005 it held 20% of the market share in automobile manufacture in the country.^[22]

Exchange Traded Funds

• Budapest Stock Exchange (BSE)

Trends and Forces

The International Monetary Fund^[23]

Low, and Slowing, Growth

Hungary is inarguably the most developed Eastern European country aside from Slovenia. The large presence of foreign companies, stable government, and developed infrastructure make it an ideal location for stable investment. However, these same factors mean that Hungary is not experiencing the rapid growth of many other countries in the region. GDP growth averaged 4.4% between 1997 and 2007, compared to rates between 6 and 10% for other developed Eastern European countries.^[24] In 2007 and 2008, as can be seen on the graph at right, growth was less than 2%, which is below that even of most developed Western countries. This slowed growth could be indicative of the higher costs and the slowing of entrance by foreign companies, but it would ultimately translate in the long run into lower profit expansion.

The International Monetary Fund^[25]

Rising Costs

Costs of doing business in Hungary have risen rapidly since 2001. In the early 1990's, Hungary was one of the best low-cost alternatives for manufacturing in Europe, especially for pharmaceutical companies. Average wages were well below those of Western Europe. However, wages have risen as Western European companies invested in the country. Hungary however experienced some of the most aggressive foreign investment of any Eastern European country, as described above. In the years before Hungary's accession into the European Union, between 2000 and 2004, rapid growth occurred as the already stable country became even more attractive. This has led to a convergence of costs between Hungary and Western European countries. In 2007 GDP per capita was nearly $16,000^[26], which is nearly half that of the average Western European country. This is 32% higher though than "cheaper" Eastern European countries such as Romania and Bulgaria, whose GDP per capita was around $11,000 in 2007.^[27]

High Inflation and Government Debt Lead to Higher Taxes

Inflation in Hungary is still very high, preventing it from joining into the Euro currency group. At more than 7%, it is well above the acceptable 3% level necessary to join. Additionally, the government has been running a 4.9% budget deficit annually. These two factors combined prevent Hungary from adopting the Euro, one of the goals of the administration. To combat the high deficits, the government is raising taxes on businesses from 16% to 4%.^[28] This additional tax burden, coupled with Hungary's already demanding social benefits payments from businesses and rising wages, makes doing business in Hungary even less profitable. Businesses in Hungary thus will be forced to cut costs in some ways, or accept lower revenues, or move from Hungary which could cause high short-term moving costs.

Pharmaceutical Presence Increasing

Despite rising costs and taxes, one area in Hungary which continues to do well is the pharmaceutical industry. In 2005, Hungary produced 148 billion HUF worth of pharmaceuticals.^[29] Pharmaceutical manufacture is well suited to Hungary because it has high safety standards, a skilled workforce, and close proximity to the Western European market. As an aging population grows in Western Europe, there is increasing demand by governments in those countries that supply national healthcare for cheap drugs, and Hungary as a major manufacturing base of branded and especially generic drugs will benefit from increasing demand in this area. Some pharmaceutical companies in Hungary include Abbott Laboratories (ABT), GlaxoSmithKline (GSK), Merck (MRK), Novartis AG (NVS), and Pfizer (PFE).

References

1. ↑ NationMaster: Economic Statistics on GDP Growth, Hungary
2. ↑ NationMaster: Economic Statistics on Economic Overall Productivity, Hungary
3. ↑ CIA World Factbook: Hungary
4. ↑ CIA World Factbook: Hungary
5. ↑ The American Chamber of Commerce in Hungary: Business in Hungary
6. ↑ Organization for Cooperation and Economic Development: Country Statistics 2006
7. ↑ The World Bank Education Statistics 2008
8. ↑ World Bank Worldwide Governance Indicators 2008
9. ↑ Smart Investing in Hungary, from Institutional Investor
10. ↑ The International Monetary Fund World Economic Outlook database 2008
11. ↑ MOL Company Website: First Half Preliminary Results
12. ↑ essWeek Profile: FHB Mortgage Bank Public Limited Company
13. ↑ OTP Bank Annual Report 2007, Page 60
14. ↑ US Department of State 2007 Investment Climate Statement: Hungary
15. ↑ Magyar Telekom Quarter 2 Report 2008
16. ↑ Linamar Company Website
17. ↑ Deutsche Telekom Company Website
18. ↑ GE Company Website: GE in Hungary
19. ↑ The American Chamber of Commerce in Hungary: Business in Hungary
20. ↑ Telenor Company Website: Hungary
21. ↑ US Department of State 2007 Investment Climate Statement: Hungary
22. ↑ The American Chamber of Commerce in Hungary: Business in Hungary
23. ↑ The International Monetary Fund World Economic Outlook database 2008
24. ↑ The International Monetary Fund World Economic Outlook database 2008
25. ↑ The International Monetary Fund World Economic Outlook database 2008
26. ↑ The International Monetary Fund World Economic Outlook database 2008
27. ↑ The International Monetary Fund World Economic Outlook database 2008
28. ↑ US Commercial Service: Investing in Hungary
29. ↑ Hungarian Pharmaceutical Manufacturers Association