Investor Protection and Regulations in Hungary
Hungary has a robust framework to protect foreign investments. It is party to over 60 bilateral investment treaties (BITs) and several multilateral international investment agreements under the auspices of the World Bank (ICSID) and United Nations (UNCITRAL).
These BITs provide protections like fair and equitable treatment, protection against expropriation, free transfer of funds, and dispute resolution mechanisms. Key agreements are with countries like Germany, France, UK, Netherlands, China, South Korea, India and the US.
Investor disputes can be settled by international arbitration through ICSID, UNCITRAL or the ICC International Court of Arbitration. Hungary is a signatory to the New York Convention which enforces international arbitration awards.
There are also strong domestic laws like Act No. XXIV of 1988 on Foreign Investments, the Civil Code and Companies Act that provide a robust legal framework. Foreign companies in Hungary have the same rights as domestic companies. Expropriation can only be carried out in exceptional cases in public interest.
The government has stated its commitment to foreign investors through the Eastern Opening policy and by establishing investment promotion agencies like HIPA. Hungary also ranked 67th out of 190 countries in the World Bank’s 2020 Ease of Doing Business rankings.
Overall, foreign investors in Hungary can rely on comprehensive legal protections against arbitrary government actions, an effective dispute resolution system, and policies aimed at attracting and promoting investments.
Risks and Challenges
Like other emerging markets, investing in Hungary comes with certain risks and challenges that investors should be aware of.
Political Risks
Hungary has seen some political uncertainty in recent years with more nationalist and populist parties gaining influence. This could potentially lead to policy changes that are less favorable for foreign investors. The Hungarian government has come into conflict with the EU over rule of law issues as well. Political risks need to be monitored.
Economic Risks
Hungary has a debt to GDP ratio over 70% which poses macroeconomic risks. Growth is projected to slow in the coming years. The Hungarian economy is dependent on exports and integrated supply chains in Europe which poses risks. Exposure to the eurozone economy makes it vulnerable to downturns.
Regulatory Risks
Regulations and tax policies are subject to change as new governments come into power. Investors have faced unpredictability in policy changes affecting sectors like retail, energy, and banking in recent years. Regulatory risks remain a concern.
Corruption
Corruption has been a problem in Hungary with issues like cronyism, lack of transparency, weak institutional checks and balances. Hungary ranks poorly on corruption perception indexes. Investors have to factor in graft and bribery risks.
Bureaucracy
The bureaucracy and red tape involved in getting permits, licenses, and other approvals can be frustrating for foreign investors in Hungary. Complex administrative processes hamper the ease of doing business.
Foreign Exchange Risks
The Hungarian forint has fluctuated significantly against major currencies like the euro and dollar in recent decades. The risk of currency depreciation can adversely impact foreign investors.
Shortage of Skilled Labor
Hungary faces shortages of skilled workers in sectors like IT and engineering. The labour force is also shrinking due to an ageing population and emigration. This poses HR challenges for investors.
While the risks should not deter investment, careful evaluation and risk mitigation strategies need to be developed. Political and economic uncertainties continue to impact the investment climate.
