Hungary stands apart from most European Union member countries, not just for its populist conservative politics under Prime Minister Viktor Orbán, but also for its relatively buoyant economic performance, with headline GDP growth figures substantially exceeding many other European economies. Real GDP growth in 2018 was 5.1%, according to the European Commission’s Eurostat agency, improving on a 4.3% rate the previous year. That compares favorably to both the overall EU average of 2.6% and Germany’s 1.5% in 2018.

In November, the European Bank for Reconstruction and Development (EBRD) confirmed that the trend has continued, and raised its forecast for Hungarian GDP growth for the full year to 4.6%, slightly lower than the Hungarian government’s own forecast of 4.8%.

That confirms that “the Hungarian economy is still doing great,” says Lajos Török, head of Equity Research and Strategy at Hungarian asset manager Equilor Investment in Budapest. Expectations are that GDP growth “will still be high next year,” he adds, “obviously not 5% high, but in the range of 4% to 4.5%. So we expect this to be slowing a bit, but still growing dramatically in the next few years.”

What’s driving Hungary’s relatively above-par performance? “Hungary, as a whole, relies very much on the macroeconomic development of the eurozone, given its exposure to the car industry and EU funding,” says Hai Thanh Le Phuong, head of Research at Concorde Securities, a leading independent Hungarian investment bank.

The construction and services sectors are also significant contributors, although growth in construction is likely to tail off, Török suggests. “We expect the construction sector to be trending down next year, as VAT for construction services will be higher by the end of the year,” he says. “We expect a significant price increase in the sector.”

Services, however, are likely to stay buoyant, the OECD predicted last month in its Economic Outlook on Hungary: “Private consumption will continue to drive growth on the back of strong gains in real incomes. Public investment will decelerate, along with declining disbursements from EU structural funds.” Domestic drivers supporting growth, according to the OECD, will include “continued solid gains in employment and real wages, an all-time high consumer confidence, housing investment support schemes and very accommodative monetary policy.”

Inflationary Pressures

Hungary remains outside the eurozone, with its own currency, the forint. Currency fluctuations with its close neighbors in the EU can therefore affect the economy significantly. “The Hungarian forint was one of the weakest currencies [of 2019] so far, which obviously helps the export sector,” Török observed in December, “but it can increase inflation if it continues.”

The OECD registers this point as well, noting “low monetary-policy rates, including a negative overnight deposit rate.” Meanwhile, “core inflation has continued to increase, while headline inflation has eased to below 3% on the back of lower energy prices. A weakening of the forint is adding to inflation pressures.” Gradually nudging rates back up “would reduce the risk of overheating and contain inflation expectations.”

Thus far, however, a weak forint has worked in Hungary’s favor. “Currency factors impact inflation, but more importantly, competitiveness,” says Le Phuong. “The recent wage inflation in the country was mitigated by weaker currency and thus Hungary remained more attractive to investors.” Hungary has established itself as a major manufacturing base and parts supplier for Audi, BMW, Bosch and other auto-industry majors. According to figures from the Hungarian Investment Promotion Agency (HIPA), the auto sector accounted for 28.7% of Hungary’s manufacturing output in 2017.

“The main question is how the volatile currency will affect local firms,” says Török. “It is a little harder for companies to create their budgets and expectations for next year.” All the same, “we expect fluctuations to be a small problem for the Hungarian economy.”

Real estate has benefited from the rise in incomes and general economic buoyancy. Eurostat data for the House Price Index in the second quarter of this year, against a baseline of 100 in 2015, put Hungary at 162.46, the highest figure in the EU, compared with 121.10 for Poland and 99 for Italy. Foreign investment demand for properties in Budapest, as well as a drop in the VAT rate on new properties from 27% to 5%, have been significant drivers.

Financial Market Rumblings

Financial markets, too, are spreading their wings. One significant development is last June’s launch of the Hungarian Government Security Plus (MÁP+), a five-year bond that can be purchased and transferred by resident and nonresident individuals, according to Hungary’s Government Debt Management Agency (ÁKK). The reason MÁP+ is attracting so much interest is the offered coupon rate, which begins at 3.75% in the first half of the year of issue, then escalates in annual increments from 4% in the second half to 4.5%, 5%, 5.5% and eventually 6%.

This rate “is very high compared to the average return available through other investments,” notes Török. “That is having a significant cannibalization effect on the financial sector.”  By late November, Hungarian households had purchased more than 28 billion florints worth of this so-called “superbond,” while other government securities shrank in volume. 

While he predicts that a bond with such a high yield will be sustainable, Török adds, “Obviously, it will be the government’s decision whether to decrease it in the near future.” Previously, he notes, the government decreased the premium on the state’s inflation-linked retail bond from 1.7% to 1.4%. “So maybe that shows the direction for the future.”

In general, “margins, given the global low-yield environment, are expected to remain subdued or trend down,” although in Hungary they will remain above the country’s eurozone peers, Le Phuong agrees.

That extends to the equity market, he adds: “Growth will slow down, but still be solid. As a whole, we expect some decline in return on equity, but still sound fundamentals.”

For Hungarian banks, however, just like those in other countries, the challenge is to respond successfully to the introduction of new, innovative technologies into the industry. “Fintech companies are entering the market,” says Török, citing Revolut, a UK-headquartered retail financial-services provider that now has 250,000 users in Hungary, as a standout example.

 “The biggest question in Hungary now in the banking sector is whether MKB, Budapest Bank and the co-ops will manage to merge together to a giant conglomerate in the near future, challenging other big banks,” says Le Phuong.

Of the key domestic players, “the largest one is OTP Bank,” notes Török. “It is the largest company in the Budapest Stock Exchange. The second- and third-largest players are Erste and K&H, which are Austrian and Belgian banks, so the three largest banks are private-sector. Some of the players, like MKB and Takarek Bank, had government backing, but the largest banks are private.”

Politics: Opposition Gains

All across Europe, politics loom large over the economy and financial markets, and Hungary is no exception in this. The October local elections marked one of the most significant upsets of recent years, when opposition parties, exercising an unusual degree of coordination and cooperation in fielding a joint list, scored victories in key cities across the country. Most significant, perhaps, was the result in Budapest, which exercises a disproportionate influence on the entire Hungarian scene. There, Gergely Karácsony, candidate for the opposition Momentum–DK–MSZP–PM–LMP alliance, defeated incumbent István Tarlós of the ruling Fidesz–KDNP coalition to become mayor. In the concurrent Budapest Assembly elections, the opposition alliance gained a majority for the first time in over 15 years.

Could this signal the end of the Orbán era, and a new direction for Hungary? Despite the dramatic opposition gains, Török doesn’t see any significant change, especially in the economic and financial environment, until the next parliamentary elections in 2022.

Péter Halácsy has the distinction of having created Hungary’s first tech unicorn, one of the few from the entire CEE region.

Prezi, the presentation-software giant he helped found, had its origins in 2008, in a personal tool hand-coded by co-founder and artist Ádám Somlai-Fischer, who wanted to be able to zoom in on key concepts when presenting his work. Halácsy, then an academic at the prestigious Budapest University of Technology and Economics and co-founder of innovation lab Kitchen Budapest, saw Somlai-Fischer’s homemade presentation software and set about to improve and commercialize it.

The two budding “technopreneurs” brought Hungarian-Swedish business figure Peter Arvai on board and incorporated Prezi in May 2009. Two months later, the company became the TED Conferences’ first ever investee. By November 2009, it had opened an office in San Francisco. Prezi has been scaling like one of its trademark zoom-outs ever since. In April 2018, Prezi announced that “the company now has more than 100 million users worldwide,” and that “Prezi presentations have been viewed over 3.5 billion times.”

Halácsy remains a pillar of Hungary’s start-up and venture scene. With Arvai and others, he co-founded Bridge Budapest, a nonprofit association dedicated to promoting local entrepreneurship and the domestic start-up culture.

Halácsy’s commitment to fostering talent and positive values ranges far beyond technology and entrepreneurship, though. Through his Budapest School platform, founded in 2015, he is building “a network of community-funded microschools,” with a curriculum emphasizing critical thinking and creativity to nurture future citizens and leaders. Halácsy also helped create the Heroes Square Project, which offers training, workshops and other programs to instill a culture of social and civic responsibility in Hungary.

“I don’t want to change people anymore, but I want to help them to change themselves,” Halácsy says. “I decided to connect people to help them to achieve what they want. That’s why I call myself a change agent.”

Central and Eastern Europe are infinitely more diverse than areas farther west, encompassing European Union member states along with countries still classified by MSCI as frontier markets. The state of innovation in the various constituent economies is equally diverse, yet substantially lags the West. Only Slovenia ranks in the European Innovation Scoreboard as a Strong Innovator. Insufficiently developed financial systems, the lack of an entrepreneurial culture and the perhaps related legacy of communism are all cited as contributing factors. Whatever the causes, the results are unarguable—and unflattering.

Even Russia—with its huge population and addressable market, world-famous research institutions and long tradition of impressive breakthroughs in rocketry and elsewhere—has nowhere near the kind of innovation ecosystem found in Western continental economies. According to RG Partners and EY, Russia’s investment in venture innovation for 2016 year totaled just $900 million, compared to some $70 billion for the US and around $30 billion for China.

There seems to be something like an inverse relationship between size and innovation success. Tiny Estonia, with its population of around 1.3 million, has a well-deserved reputation as an innovation leader for CEE. The country declared access to the Internet a basic human right in 2000, and in 2005 became the world’s first nation to allow citizens to vote online. Estonia is well ahead of the EU average in relative venture investment and patent applications, and its success as a magnet for venture-capital investment is typified by the currency-transfer service TransferWise, valued at $1.1 billion in its latest funding round after gathering some $117 million in venture investment as of 2016.

As this suggests, some strikingly creative and successful innovators have arisen in the region, against the odds. Some of the most celebrated corporate success stories are Skype, with its Estonian engineers, and Evernote, founded by Azerbaijani Russian entrepreneur Stepan Pachikov. On the banking and financial-services side, there are players such as Poland’s Asseco, with its Asseco Omnichannel platform that unifies information from many banking channels; and Lithuania’s Siauliu Bankas, with its InnovFin guarantee system for extending finance to innovative small and medium-size enterprises (SMEs) in Lithuania.

A clear standout for Financial Innovator was Raiffeisen Bank International (RBI), the international arm of Raiffeisen Banking Group Austria and long a dominant force in banking in CEE. Its SEPA Instant Credit Transfer (SCT Inst) service, which facilitates currency flows across the region, is one of the innovations that elevated RBI to the honor.

Introduced by the European Payment Council, SCT Inst is a platform designed to support payments integration across the 34 member countries, both inside and outside the eurozone, that make up the Single Euro Payments Area (SEPA) “by enabling pan-European credit transfers with the funds made available on the account in less than 10 seconds,” according to the EPC. RBI got behind the SCT Inst project as part of its continued commitment to its function as a clearing bank. RBI’s payments and cash management services have long been two of its core businesses, and are a strategic priority in its development plan for the region.

In line with this commitment, RBI became one of the pilot banks for EBA Clearing’s RT1, the Euro Banking Association’s “infrastructure solution for the processing of instant SEPA credit transfers.” To deliver Instant Payments, RBI had to implement the service in its payment processing, core banking and customer front-end systems. The processing center had to be available 24/7/365, with continuous online communication with the

relevant systems, and offer compliance monitoring and fraud detection in all processes. Finally, RBI had to manage liquidity provision, with the supporting funds available on the RT1 account at any given time. All these challenges were overcome, and RBI went live with SEPA Instant Payments on Nov. 21, 2017—one of the first European banks to do so.

Instant Payments are now available to all RBI clients, both retail and corporate. Retail customers can already use Instant Payments online through RBI’s Internet banking system, Mein ELBA, which serves some 1.8 million online-banking users. The same functionality will be implemented for corporate ebanking customers from mid-2018.

Hack Checkers

Banks would be nowhere without security software; and given the inventiveness of hackers and scam artists, it’s no surprise to see security innovations recognized. Avast Software, the Czech cybersecurity software company, takes the Global Finance honor for Corporate Innovator—CEE. The 30-year-old company is enjoying a spell in the limelight after its $3.25 billion listing in May 2018 on the London Stock Exchange—the UK’s largest-ever tech IPO. Avast claims to have over 435 million monthly active users, making it the world leader in the consumer-security field, preventing over 2 billion attacks per month. It has over 1,500 employees worldwide and retains former chess grandmaster Garry Kasparov as “Security Ambassador.”

It was founded in 1988 as a cooperative by Eduard Kuera and Pavel Baudiš, both then researchers at Czechoslovakia’s Research Institute for Mathematical Machines. The region was then under communist rule, and Czechoslovakia still a single country. Three years later, the cooperative became a joint partnership, with an antivirus product called Avast. The software won awards and gained international licensees (including McAfee); but competition from that rival and others drove the company to adopt a freemium model, which turbocharged adoption. After hiring an international CEO, Vince Steckler, in 2009, Avast rebranded in 2010 as a private company under the name of its key product line and held a $100 million VC round. In July 2016, Avast acquired Czech-originated rival AVG Technologies for $1.3 billion.

Avast is still closely entrenched in Czech society, especially through the Avast Foundation, a philanthropic platform created by its founders for hospitals and hospice care, medical education and other community-support causes.