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The government has taken steps to contain the fiscal deficit in the wake of the recession and the crisis in external capital markets. Continued efforts in 2010 will be important to bolster financial market confidence, but also to gradually reduce Hungary’s tax burden, which would ultimately benefit private investors. The banking sector has weathered the financial crisis reasonably well, although government guarantees and liquidity injections have provided significant support. The challenge for the banking system is to increase its reliance on domestic sources of funding and revive credit growth without undue government intervention. Hungary has established itself as an important location for export-oriented international companies from western Europe. Sustaining this role, especially in capital-intensive sectors, will require stable policies, particularly those concerning the tax regime and tariff-setting by utilities.
Business environment and competition
Hungarian firms still see political uncertainty as the main obstacle to their operations and growth, as well as labour regulations and lengthy business licence and permits processes. Hungary welcomes foreign direct investment, and there has seen expansion of foreign research and development, pharmaceutical and semi-conductor companies in the country.
The continuing uncertainty in the international financial markets has meant there remain substantial risks to the viability of public-private partnerships in the infrastructure sector. The government has also approved a long-awaited reform strategy that will assist in the restructuring of the railway sector.
Infrastructure - Power and energy
Hungary’s electricity market has been fully liberalised since early 2008. Nevertheless, the incumbent state-owned power company, MVM, retains its dominant position. The government has changed a law that protected domestic energy companies from foreign take-overs, a provision that had been challenged by the European Commission.
The long period of rapid credit growth and the deterioration in banks’ lending standards underline the risks to future bank asset quality should the recession be prolonged. Risky lending practices were only belatedly reined in by the supervisor, whose powers are now being expanded. In September 2009 the government and most commercial banks agreed a code of conduct on retail lending. The government also put in place a mortgage debt service guarantee scheme that would safeguard debt service of households without eroding credit discipline of households.
The foreign-owned bank subsidiaries that dominate the market are also setting tighter lending standards. European parent banks have confirmed their commitment to their exposure in Hungary, and their respective supervisors are cooperating closely with their counterparts in Hungary.
Over many years, Hungary’s traditionally high tax burden and generous social programmes have eroded incentives for employment and encouraged the growth of the informal economy. Under the fiscal reforms adopted in the spring of 2009, measures have been taken to improve labour market efficiency and contribute to raising long-term growth.
Last updated 21 April 2010