Hungary experiencing high levels of capital flight outside financial sector

November 7, 2014

flight reports that Hungary’s “unorthodox” anti-free market economic policies and recent allegations of systemic corruption have seriously tarnished the country’s image in the eyes of foreign investors.

The business daily writes that proposed changes to the tax code as well as the 2015 budget indicate a decline in economic expectations by the government, which is projecting 2.5 percent growth the second half of 2014 and just 2 percent in 2015. writes that rising global and regional uncertainty could adversely affect global financial markets, especially as EU 2014 3rd-quarter economic figures indicate a general slowing down of the economy, including that of Germany, Hungary’s main trading partner and customer for its products.

According to the proposed internet tax has further undermined confidence in the government’s competence at home and abroad, and that EU development funds and further reductions to household utility costs are unlikely to boost investment or consumption to the extent they did the first half of 2014, when Hungary’s economy grew 3.7 percent.

Capital flight

A worrying sign of a loss of investor confidence in Hungary is the outward flow of capital outside the financial sector. writes that in 2013 a total of EUR 1 billion arrived to Hungary, but after deducting the EUR 1.9 billion in fresh capital foreign banks were compelled to inject into the country’s financial sector, EUR 1 billion actually left Hungary. writes that during the first half of 2014 a total of EUR 700 million left the country, partly in the form of dividends traditionally paid out during the 2nd quarter.  However, adjusting for EUR 600 million injected into the financial sector through the end of June reveals that some EUR 1.3 billion left Hungary the first half of 2014.

Furthermore, the cost to Hungary of raising capital is increasing, not merely in terms of yields of government paper but also in terms of direct subsidies paid to foreign investors.   It cites the example of the Apollo tire factory which reportedly received state subsidies totaling some HUF 30 million per employee, or three or four times the amount previously paid out.

The business daily believes that allegations of systemic, official corruption will lead to greater caution by investors.