After more than a decade's effort of transformation into a market economy, Hungary, by far the largest export market for Hong Kong in Eastern Europe, has entered into another stage of further integrating with Western Europe, when the country, together with other nine East European and Mediterranean countries, acceded to the EU on 1 May 2004. Hungary is widely recognised as one of the best-prepared countries to have joined the EU. This is thanks partly to the political and economic stability enjoyed by the country since the liberalisation of the 1990s.

Relatively speaking, Hungary's business environment is more liberal than many other East European countries. Accession to the EU has only reinforced the country's solid fundamentals. Notably, its better business infrastructure, including its financial and legal environment, has enabled the country to play a leading role in business, finance and trade in Central and Eastern Europe, making it a place conducive to business activities.

The Hungarian economy has expanded steadily in the last decade. Its GDP grew by an average of more than 4% per year in the latter part of the 1990s, followed by steady expansion upon entering the 21^st century. As a result, its unemployment rate stands currently at about 7%, a level lower than in most West European countries. Inflation has been kept at a low level, thus contributing to a favourable environment for business and investment activities.

Although the country, with a population of 10 million, is not the largest among the new EU members, its per capita income is one of the highest in Eastern Europe. This is due to a number of factors, especially the inflow of foreign capital. In particular, the privatisation law promulgated in 1995 cleared away obstacles to the privatisation of state-owned enterprises. This has encouraged foreign participation in the economy, creating a major impetus to economic growth. Coupled with the country's notable entrepreneurial skills and well-educated labour force, Hungary has been among the major recipients of foreign direct investment in Eastern Europe, even well before its accession to the EU.

B. Hungary as a Major Recipient of Foreign Direct Investment

Hungary has had a steady inflow of foreign direct investment in the last decade. Foreign investors have established more than 25,000 companies in the country since 1990, bringing in accumulated capital of some EUR 49 billion¹ by end-2005. This has made Hungary a leading destination for foreign direct investment in the Central and East European region in per-capita terms.

At present, foreign-invested companies employ over a third of the total industrial workforce in Hungary, generating some two-thirds of Hungarian exports. The largest foreign investor is Germany, which accounted for 29% of the stock of Hungary's foreign direct investment as at the third quarter of 2005, followed by the Netherlands (20%), Austria (11%) and the US (5%). Other major investors include France, Luxembourg, Italy and Japan².

Notably, the manufacturing sector has been the major investment target of foreign investors, accounting for almost half of the stock of foreign direct investment in the country. This has helped enhance the efficiency of the manufacturing sector, and in turn has contributed significantly to the country's economic growth. Investment in relation to processing production, in particular, has served to facilitate industrial production and hence external trade. This has played an important role in establishing new industries in Hungary, such as the assembly of automobiles, as well as the manufacturing of auto-parts, electronics parts and components, chemicals and food.

Robust industrial production in Hungary has stimulated the country's demand for a wide range of material and industrial inputs. Collaterally, increases in economic activities have brightened employment prospects for the Hungarian people. This has helped maintain a low level of unemployment, and promoted increases in incomes, which are conducive to the country's demand for a wide range of consumer goods.

C. Growing Appetite for Consumer Goods

Given increasing business activities amid a continued inflow of foreign capital, income levels in Hungary have risen rapidly in the past few years. As Hungarians' purchasing power has increased, consumer spending has expanded steadily, resulting in a growing appetite for consumer goods. Although Hungary has substantial production of certain consumer items, its demand for a wide range of light consumer goods must be met by imports. The expansion in consumer spending has thus led to an expanding demand for imports.

In 2005, the average monthly gross earnings of Hungarian employees amounted to HUF 158,315 (US$793), up from HUF 122,482 (around US$480) in 2002. While manual workers usually have monthly earnings that are lower than the average, non-manual employees are better off. Skilled workers and office staff who reside in the capital Budapest and other major cities have a higher income than the average. Such skilled workers in Hungary can earn as much as US$500 - US$800 a month, and often middle management staff can earn a monthly salary of over US$1,000.

Against this background, consumer demand has expanded steadily, leading to increases in retail sales. Following Hungary's accession to the EU, economic activities have grown further alongside the country's further integration with Western Europe, thus providing an added boost to the Hungarian consumer market.

D. Fast Expansion in External Trade

Along with increasing economic activities, Hungary's external trade has been growing steadily. In particular, trading activities have been strengthened by booming processing production, due mainly to increases in foreign direct investment in the country. During 2001-2005, both imports and exports surged, although trade deficits were recorded over the years.

The Hungarian external sector is dominated by trading activities related to machinery and transport equipment, which accounts for over half of exports and imports in value terms. This is due mainly to rising foreign investment in the assembly of automobiles, electronics, electrical apparatus and machinery, as well as supporting industries set up by both local and foreign enterprises in the country. While production of these items mainly caters for the overseas market, it is supported by a wide variety of inputs produced locally and abroad. The boom in such production has evidently created an expansion of intra-industry trade, making machinery and transport equipment account for a significant share in Hungary's trade.

Market-wise, the EU is Hungary's largest trading partner, accounting for 74% of the country's total exports and 58% of total imports in 2005. This is due mainly to processing production arrangements conducted in the country by foreign companies, especially those from Western Europe. Increasingly, EU companies are using Hungary as one of their manufacturing bases for processing production, while a substantial number of companies from the US and Asia are investing in Hungary's manufacturing sector in order to tap the West European market. Germany is Hungary's largest EU market, followed by Austria, Italy and France.

E. Hungary as the Largest East European Market for Hong Kong

Hungary is by far the largest market for Hong Kong in Central and Eastern Europe, followed by Russia, Poland and the Czech Republic. Hong Kong's total exports to the country grew robustly from the latter part of the 1990s to US$993 million in 2005.

Unlike the trade patterns with other East European partners, Hong Kong's exports to Hungary are mainly industrial inputs. The largest export item in 2005 was telecom equipment and parts, accounting for 57% of the total export value. Other exports included electrical apparatus for electrical circuits (10%), optical instruments and apparatus (7%), parts and accessories of office machines/computers (6%) and electric power machinery and parts (5%). This is due mainly to strong input demand from Hungary arising from the country's robust industrial activities. Sales have also been aided by the competitiveness of Hong Kong exporters, who are able to tap demand by rendering quality industrial inputs at competitive prices.

¹ Hungarian Investment and Trade Development Agency
² Hungarian Investment and Trade Development Agency