The Hungarian Investment Environment and The Hungarian Investment Environment and Incentive SystemIncentive System

December 2004

Ministry of Economy and Transport

Republic of Hungary

Hungary: a New Member of the European Union

Land: 93,030 km²

Population: 10,116,000 people

GDP (2003): USD 82,757million

HUNGARY: the Reliable Partner

No political riskNo strikes

No social conflicts

No institutional riskEarly deregulation

EU compatible institutionsCreditworthiness

No financial riskModerate income policy

Sound & transparent fiscal policyStable monetary policy

… 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 ..

On an investment and export driven growth path together with the EU since the 1990s

YES to Investments

The New Vision of HUNGARY

Ideal geographic location

Modern economic structure

Connecting the most developed and the fastest developing countries

Rapid liberalisation

Sound stabilisation

Radical privatisation

A BRIDGE binding West with East, North with South

in Europe

4 Pan-European Corridors

Gate to South East Europe

Direct access to the EU

• Rate of growth reached 4,1% in H1 2004

• Consumption dynamics high but on a declining trend

• Volume of investments grew by 13,5% in H1 2004• • Investments in manufacturing grew by 25,3%!

• Industrial boom since Q4 2003; 10.4% y-to-y growth in H1 2004

• Industrial export growth exceeded 20% in H1 2004

• Low unemployment (5,9%) compared to EU-average in H1 2004, and moderating wage dynamics

• Annual inflation at 4,7% in 2003, speeding temporary up in 2004 due to VAT-regulation

Hungarian Economy: Improving Macroeconomic Figures

Investments

GDP

Output

Inflation

Consumption

Employment and wages

Hungarian GDP Growth Follows the Trend of the EU

Source: Central Statistical Office, Eurostat

Quarterly GDP growth rates

0

1

2

3

4

5

6

7

Q12000

Q2 Q3 Q4 Q12001

Q2 Q3 Q4 Q12002

Q2 Q3 Q4 Q12003

Q2 Q3 Q4 Q12004

Q2

chan

ge

on

th

e s

am

e q

uar

ter

of

pre

vio

us

year

, p

er c

en

t

Hungary EU-15

Short Term Economic Effects of the EU Accession*

Industrial

production

Growth rate

Infrastructural investments

Foreign direct

investments

• an 0.8 percentage point increase in the GDP growth rate

• phasing out of tariff free zones• state subsidy system in line with EU regulations• increased business confidence• regional hub role (the bridge between the EU and Eastern Europe)

• a 1.0 percentage point increase in the rate of industrial output growth due to higher export sales dynamics

• stronger competition and drive for innovation increase competitiveness

• use of EU funds will boost the construction industry

• transport infrastructural investments may reach EUR 10-11 billion until 2010

* based on a joint study of three economic research institutes

Outlook for EMU Membership

Possible

disadvantage

Target date

Challenges to face

Advantages

• Date of possible entry in 2010

• Lower real interest rates boost investment • Fixed exchange rate risk eliminates conversion costs and

exchange rate risk• Expanding foreign trade supports economic growth• The single currency could increase the rate of economic

growth by 0.6-0.9 percentage points annually.

• Giving up independent monetary and exchange rate policy as an instrument for managing asymmetric shocks

• Government deficit (appr. 5.1-5.3% in 2004) and inflation (appr. 6.7-6.8% in 2004) significantly exceed the Maastricht threshold

• Meeting the Maastricht convergence criteria has a short-run cost

Hungary has been attracting a continuously high inflow of foreign direct investment

Source: National Bank of Hungary

Annual FDI inflow* to Hungary

3 068

2 5752 4892 381

2 143

3 1653 439

924

2 645

0

300

600

900

1 200

1 500

1 800

2 100

2 400

2 700

3 000

3 300

3 600

3 900

1996 1997 1998 1999 2000 2001 2002 2003 2004

*Excluding other capital, including reinvested earnings

euro

mil

lio

njan-apr

GK

M-projection

3 500

Cumulative FDI inflows to Hungary reached EUR 45 billion (more than 40% of GDP) from 1989 by June 2004.

Other34,8%

The Netherlands14,7%

United Kingdom

4,4%

Germany18,0%

USA10,8%

Japan6,2%

Austria11,1%

FDI Inflow by Countries1989-2004 June

• Direct Incentive for Investments

1. Economic Competitiveness Operative Program (ECOP)2. Special incentive package for strategic investors3. Subsidy for employment creation and training

• Indirect Incentives

1. Tax-related Incentives2. Offset programs

From 1st January, 2003 EU-conform regulation in force

Implementation

EU Conform Regulation on FDI

The ECOP is one of the five operative programmes through which the National Development Plan (NDP) 2004-2006 will be implemented in Hungary. The overall objective of the NDP is to reduce the income gap relative to the EU average.

Within ECOP non-refundable grants are available for investors up to HUF 25-150 million (USD 125-750 thousand) per project through the following investment promotion tender applications:

Technological modernisation (ECOP 1.1.1.) Establishment of regional corporate centres (ECOP 1.1.2.) Strengthening of first tier suppliers (ECOP 1.1.3.) Development of industrial and innovation infrastructure (ECOP 1.2.1.) Development of logistic centres and their services (ECOP 1.2.2.)

Access to EU Structural Funds: Tender applications co-financed by the European Union I.

Economic Competitiveness Operative Program

Non-refundable grants are available for small and medium enterprises upto HUF 1.4-25 million (USD 7-125 thousand) through the following tender

applications:

• Support for the development of technical and technological background of SMEs (GVOP 2.1.1.)

• Support for modern management systems and techniques for SMEs (GVOP 2.1.2.)

• Support for advanced level technical consultancy (GVOP 2.2.2.)

• Support for the organisation of co-operation between SMEs (GVOP 2.3.1.)

Access to EU Structural Funds:Tender applications co-financed by the European Union II.

Economic Competitiveness Operative Program

Special Incentive Package for Strategic Investments

If the investment volume reaches

• EUR 50 million by projects of the manufacturing industry or

• EUR 25 million by establishing regional corporate service centres

The Hungarian Government decides on granting a customized incentive package

Within the customized incentive package more favorable and significant subsidy is available than through ECOP and SMART tender applications.

• Corporate-tax decreased down to 16 % (from 18%),

one of the lowest rates in continental Europe

• For major investors, 10-year-long development tax benefit

up to 80% of the due corporate tax

• Corporate tax benefit up to 25% of local tax (50% from 2005)

• Tax-free investment reserve

• Tax allowances for corporate R&D and innovation

Indirect Incentives

Tax-related incentives

KASSA felé

SKSK

AA

SLOSLO

HRHRYUYU

RORO

UAUA

RábafüzesRábafüzes

ParassapusztaParassapuszta

VácVác

TornyosnémetiTornyosnémeti

RöszkeRöszke

IlocskaIlocska

LetenyeLetenye

DunaújvárosDunaújváros

EgerEger

VeszprémVeszprém

GyőrGyőr

TatabányaTatabánya

KaposvárKaposvár

PécsPécs

LelleLelle

SzekszárdSzekszárd

SopronSopron

MohácsMohács

SzékesfehérvárSzékesfehérvár

KecskemétKecskemét

BékéscsabaBékéscsaba

NyíregyházaNyíregyháza

MiskolcMiskolc

KiskunfélegyházaKiskunfélegyháza

DebrecenDebrecen

FüzesabonyFüzesabony

EmődEmőd

BajaBaja

PolgárPolgár

V

V/C

X/A

BÉCSBÉCSfeléfelé

V

V/A

POZSONY,POZSONY,PRÁGAPRÁGA

feléfelé IV

GRÁCGRÁCfeléfelé

LJUBJANA,LJUBJANA,TRIESZTTRIESZT

feléfelé

ZÁGRÁBZÁGRÁBfeléfelé

SZARAJEVÓSZARAJEVÓfeléfelé

TEMESVÁR,TEMESVÁR,BUKARESTBUKAREST

feléfeléBELGRÁDBELGRÁD

feléfelé

ARAD,ARAD,KKOOLLOOZZSSVVÁÁRR

feléfelé

LVOV, KIJEVLVOV, KIJEVfeléfelé

SzolnokSzolnok

IV

V

ARADARADfeléfeléSzegedSzeged

NagylakNagylak

DunaDuna

TiszaTisza

ZalaegerszegZalaegerszeg

TornyiszmiklósTornyiszmiklós

IV

SalgótarjánSalgótarján

M0M0

M30M30

M3M3

M2M2

M3M3

M4M4

M4M4

M5M5

M44M44

M43M43

M15M15

M9M9

M8M8 M8M8

M1M1

M7M7

M7M7 0

M9M9

M6M6

M56M56

BUDAPESTBUDAPEST

M25M25

M35M35

SzombathelySzombathely

BszgyörgyBszgyörgy

NagykanizsaNagykanizsa

Rapid Development of Transport Infrastructure

Helsinki corridorsHelsinki corridorsmotorway network in 2002motorway network in 2002Network expansion in 2003-2006:Network expansion in 2003-2006:highwayhighwaymotorway motorway highway under connstructionhighway under connstructionmotorway under constructionmmotorway under constructionmhighway under preparationhighway under preparationmotorway under preparationmotorway under preparation

V

By 2006• 431 km of expressway to be completed• 425 km under construction• Further 803 km in preparatory phase

By 2015• Network density to reach EU average

Development of Road Infrastructure - Utilising the Transit and Logistics Centre Roles

Act on development

of motorway network

• By 2015: motorway network density reaches EU average

• By 2006: - 431 km of motorway to be completed

- Another 425 km will be under construction

- Further 803 km in preparatory phase

European Initiative

for Growth

• Expected North-Southern Pan-European transport corridor

along M2 and M6 motorways• M5 and M43 motorways

Local developments

• By-pass roads

• road- and bridge reconstruction (widening to 4 lanes,

strengthening the road surface, bridge modernisation,

reconstructing intersections)• 13 logistics service centres are planned connecting to

European networks

Development of Railway and Air Transport Infrastructure

Air transport

• Airports of Debrecen and Sármellék becoming open for regular international transport • Infrastructure developments at the airports of Győr-Pér, Taszár, Pécs-Pogány, Zalaegerszeg-Andráshida and Jakabszállás

Development of railway

lines along IV. and V.

pan-European

corridors

• IV. corridor: Hegyeshalom –Tatabánya - Bp. – Szolnok – Békéscsaba - Lőkösháza• V. corridor: Bajánsenye - Zalaegerszeg – Veszprém – Székesfehérvár – Bp. – Szolnok – Debrecen – Nyíregyháza – Záhony• Investments with subsidies from ISPA and Cohesion Funds

Contacts

Ádám Terták, Chief Executive OfficerH-1061 Budapest, Andrássy út 12.Phone: (36 1) 472-8100 Fax: (36 1) 472-8101E-mail: tertak@itd.hu Internet: www.itdh.hu

Ábel Garamhegyi, Director-General for Investments and EconomicsH-1055 Budapest, Honvéd utca 13-15.Phone: (36 1) 374-2746 Fax: (36 1) 374-2726E-mail: garamhegyi@gkm.hu Internet: www.gkm.hu

Ministry of Economy and Transport

The Hungarian Investment and Trade Development Agency (ITDH):“One-stop-shop” for investors