EIB: Investment Outlook Remains Mixed in Hungary

According to the European Investment Bank (EIB) Investment Survey (EIBIS) 2024 just released, four in five Hungarian firms invested in 2023 and this is similar to last year’s EIBIS findings. However, the investment outlook has fallen and is now negative with more firms expecting to reduce rather than increase their investment in EIBIS 2024.

The investment outlook remains mixed. Hungarian firms are, on balance, negative about the political or regulatory climate, the economic climate and business prospects in the sector, with more firms expecting a deterioration rather than an improvement in the next 12 months. In particular, Hungarian firms are more negative, in net balance terms, than EU firms about the outlook for business prospects. However, Hungarian firms are slightly optimistic about the availability of internal and external finance.

The majority of Hungarian firms (73%) are satisfied with their overall investment level over the past three years, but around one in five (18%) report an investment gap. Hungarian firms were more likely to focus their investment on replacement rather than expansion compared to last year’s findings. Whilst fewer Hungarian firms focused their investment on capacity expansion in the last financial year, they were still more likely to do so than other EU firms (38% vs. 26%). Looking ahead to the next three years, Hungarian firms expect to prioritise replacement investment over expansion.

Global value chains, climate change and innovation
Compared to EU firms, Hungarian firms are more integrated into global trade, driven by large firms and firms in the manufacturing sector (62% and 70%, respectively). In EIBIS 2024, concerns about supply chain disruptions declined for both Hungary and the EU. The main trade-related challenge for Hungarian firms is access to commodities or raw materials. In response to trade shocks, Hungarian firms are more likely than EU firms to have invested in digital inventory and inputs tracking but less likely to have increased their stocks and inventory.

Whilst a majority of Hungarian firms (64%) report that they have been impacted by the physical risk of climate change (either as a major or minor impact), Hungarian firms are less likely to report having taken action to adapt to climate change compared to their EU counterparts (38% and 48% respectively).

Innovation and digitalisation are a key source of firms’ competitiveness. However, less than one fifth of Hungarian firms report innovation activity in 2023, a fall from last year’s EIBIS and below the EU average. Hungarian firms are also behind EU firms on the adoption of advanced digital technologies (53% vs. 74%). Large firms and firms in the manufacturing sector show the highest rates of digital adoption in Hungary, while the use of digital technologies is particularly low among construction firms and SMEs.

Investment barriers
The most prominent obstacles to investment activities are uncertainty about the future, the availability of skilled staff and energy costs, in Hungary as in the EU overall. In general, Hungarian firms are less likely than EU firms to see each indicator as an obstacle. Moreover, the business environment has slightly improved in several areas, especially for energy costs and transport infrastructure.

Looking into regulatory issues and the functioning of the EU single market sheds some new light on the fragmentation of the EU single market. Firms were asked whether their key product is subject to differentiated regulatory requirements and standards (e.g., consumer protection, health and safety standards, environmental standards for products) across EU countries. Six in ten (61%) of Hungarian exporters report that they have to comply with different standards and consumer protection rules across EU countries. This is in line with the in the EU average. About 60% of Hungarian firms employ staff to deal with regulatory compliance, again similarly to the EU average.

Access to finance
In the last financial year, most of the investment in Hungary was financed internally. The share of finance-constrained firms remains higher than across the EU, mainly driven by a higher share of firms whose applications for finance were rejected or discouraged.

Hungarian firms using external finance are less likely than their EU counterparts to use bank finance (55% vs. 81%). Among Hungarian firms using bank finance, loans with concessional terms are more prevalent than in the EU (39% vs. 27%). Also, Hungarian firms are more likely to use finance from grants or subsidies than across the EU (37% vs. 16%).

Gender equality in business
In Hungary, the share of firms employing at least 40% of women in senior management positions is slightly below the EU average.