The country has seen its rating improve in Euromoney’s country risk survey this year, but its EU relations are beginning to unnerve analysts by once again putting much-needed financing in jeopardy.
Although the Covid-19 crisis has increased the risks of investing in most western European countries in 2020, it is not true of central and eastern Europe where many countries are defying the odds. Hungary is certainly one of the standouts so far.
Despite its political risks and an economy undoubtedly impaired by national restrictions to stop the virus from spreading, coupled with the slump in global trade and tourism, analysts upgraded the country from January through to September.
The survey results show Hungary’s total risk score improving by almost six points, leading to a rise of 10 places to 44th in Euromoney’s global risk rankings of 174 countries.
This has seen its risk score move above the central and eastern Europe average, making the country globally a broadly equivalent investor risk to Colombia and Spain.
Invariably the economic downturn earlier in the year led to downgraded assessments of Hungary’s economic-GNP outlook indicator. The economy certainly took a big hit in the second quarter 2020, with GDP sliding on a seasonally-adjusted real terms basis by 14.6% quarter on quarter following a smaller dip of 0.4% in the first quarter, with its manufacturing base shut down, tourism brought to a halt and retail spending curtailed.
This led to a 13.5% year-on-year drop, but it softened to 4.7% year on year in the third quarter when real GDP rebounded by 11.3% quarter on quarter. The rebound should gain momentum in the new year as the vaccine rollout begins.
Still, the pandemic has put the healthcare sector under enormous pressure, chipping away at the survey’s score for soft infrastructure. Over 225,000 cases of Covid-19 have been officially recorded to date and more than 5,100 deaths among a population of almost 5.8 million, with both numbers rising daily.
Public education is astonishingly archaic, sometimes scandalous, and hospitals are mostly in poor or medium condition- Andras Vertes, GKI Economic Research
The crisis is leading to a rescheduling of non-urgent operations, with primary care facilities set aside for coronavirus cases as capacity is reached. The Hungarian Medical Chamber is warning of an inadequate number of doctors and nurses, and it is estimated that almost half of all the 67,000 hospital beds nationwide could be occupied by Covid-19 patients at some point in December.
Euromoney survey expert Andras Vertes of GKI Economic Research, an economic consultancy in Hungary, says there have been decades of “backwardness in education and health”.
“Public education is astonishingly archaic, sometimes scandalous, and hospitals are mostly in poor or medium condition.”
He has provided figures showing that over the past decade spending on social protection, education and healthcare has shrunk by 3.4% of GDP, while that on economic affairs and sport, culture and religion has grown by 3.1%, highlighting the priorities.
Despite this, all other risk indicators for Hungary have improved this year, with the biggest changes in political factors, such as government stability and the regulatory and policymaking environment. This is despite the fact the country still scores quite low in areas such as corruption and information access/transparency.
Providing investors with further comfort, Hungary also scores well for capital access and government non-payment/non-repatriation risk.
Nevertheless, Hungary’s improvement is being tested again by its caustic relations with EU partners, which have agreed to tie the disbursement of the EU’s budget and pandemic emergency funds to upholding the rule of law. This one of the fundamental tenets of the European project that both Hungary and Poland have shown a penchant for ignoring, despite years of persuasive diplomacy and legal proceedings.
Justice minister Judit Varga has accused the EU of ideological blackmail and, supported by Poland, Hungary is refusing to sign off on the deal, preventing the unanimity required for it to proceed.
There is often a limit to how far prime minister Viktor Orban goes in testing the relationship with Europe given the amount of funding at stake, which also foments support for the EU among lobbyists and the general population.
Should the government continue to resist, however, it will create another potentially unstable fault-line following Brexit. It could lead to unnecessary isolation for Hungary, harming its investor image.
Hungary is likely to be one of the key states caught at the cutting edge of the EU's emerging two-speeds approach to further economic and financial integration, believes survey contributor Constantin Gurdgiev, a professor at the Middlebury Institute of International Studies (MIIS).
“In particular, Hungary, alongside Poland, is unlikely to gain favours with the reformed European Stability Mechanism (ESM) and Budapest's access to future recovery funds is likely to come with a hefty political price tag, well beyond the demands for Hungary – along with Poland – to drop its veto on the EU budget," he says.
“As the development of new fiscal measures progresses in Brussels, both Slovenia and Poland – two key allies of Hungary – are likely to moderate their position vis-à-vis the EU, putting some isolation pressures on Hungary."
Hungary and Poland [will likely be] at odds with Brussels on the policies relating to internal mobility and acceptance of refugees- Constantin Gurdgiev, MIIS
Gurdgiev also says that a new set of the EU Commission guidelines, calling on EU member states to improve integration of migrants into European societies, is likely to put Hungary and Poland “at odds with Brussels on the policies relating to internal mobility and acceptance of refugees”.
GKI’s Vertes, meanwhile, highlights how this is putting at risk Hungary’s economic record, saying: “GDP has risen on average by 4% each year since 2014. The budget deficit-to-GDP ratio has remained well below the 3% threshold throughout. Favourable labour market trends have helped improve living conditions and reduce poverty, while unemployment has fallen to 3.5%.”
This bright macroeconomic outlook, Covid notwithstanding, has spurred investment and it offers an opportunity to engage in structural and institutional reforms that will further enhance Hungary’s image and sustain economic growth over the long-term.
However, Vertes warns that Hungary’s strengths are mostly due to the large inflow of EU funds it receives. These come courtesy of philanthropic neighbours, who are clearly looking for their non-negotiable rules to be obeyed.
“Hungary is one of the countries benefiting the most from the EU’s supports,” he says.
“In the EU’s current Multiannual Financial Framework, cohesion policy funds allocated to Hungary amount to €25.4 billion, ie around 2.9% of GDP annually. Without this, the catching up would have been much more modest.”
Unfortunately, this flow of funds has also fuelled widespread corruption – hence the low score for this particular risk factor in Euromoney’s survey. The European Anti-Fraud Office finds significantly more irregularities related to EU funds in Hungary than in other recipients and, in contrast to all other member states, far more than the number of cases reported by the national authorities.
“Corruption risks and weak accountability distort the allocation of resources, as these are not necessarily channelled to the most productive firms,” says Vertes, adding that “determined systemic action to prosecute high-level corruption is lacking”.
All is not lost. Vertes points out that if Hungary’s economy recovers to grow by 4% again when the pandemic is over, then by 2030 it could approach the economic development level of western EU member states.
But Hungary will have to move back in line. Many investors are likely to take the gamble, but equally they will be hoping the country does not remain a pariah. The Recovery and Resilience Facility funds are crucial for supporting countries through the current crisis, as is the regular budget financing.
Hungary’s journey will be a whole lot easier with the EU’s guaranteed support.