The Hungarian Investment Environment and Incentive System

1. The Hungarian Investment Environment and Incentive System Ministry of Economy and Transport Republic of Hungary December 2004

2. Hungary: a New Member of the European Union Land: 93,030 km² Population: 10,116,000 people GDP (2003): USD 82,757million

3. YES to Investments HUNGARY: the Reliable Partner No political risk No strikes No social conflicts No institutional risk Early deregulation EU compatible institutions Creditworthiness No financial risk Moderate income policy Sound & transparent fiscal policy Stable 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

4. The New Vision of HUNGARY Connecting the most developed and the fastest developing countries Ideal geographic location Modern economic structure Rapid liberalisation 4 Pan-European Corridors Gate to South East Europe Sound stabilisation Direct access to the EU Radical privatisation A BRIDGE binding West with East, North with South in Europe

5. Hungarian Economy: Improving Macroeconomic Figures GDP Consumption • 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 Investments Output Employment and wages Inflation

6. Hungarian GDP Growth Follows the Trend of the EU Quarterly GDP growth rates 7 Hungary EU-15 6 5 4 3 change on the same quarter of previous year, per cent 2 1 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2000 2001 2002 2003 2004 Source: Central Statistical Office, Eurostat

7. Short Term Economic Effects of the EU Accession* Growth rate • an 0.8 percentage point increase in the GDP growth rate Foreign direct investments • 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) Industrial production • 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 Infrastructural investments • transport infrastructural investments may reach EUR 10-11 billion until 2010 * based on a joint study of three economic research institutes

8. Outlook for EMU Membership Target date • 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. Advantages Possible disadvantage • Giving up independent monetary and exchange rate policy as an instrument for managing asymmetric shocks Challenges to face • 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

9. Hungary has been attracting a continuously high inflow of foreign direct investment Source: National Bank ofHungary

10. FDI Inflow by Countries1989-2004 June Austria 11,1% Other 34,8% The Netherlands 14,7% USA 10,8% United Kingdom 4,4% Japan Germany 6,2% 18,0% Cumulative FDI inflows to Hungary reached EUR 45billion (more than 40% of GDP) from 1989 by June 2004.

11. EU Conform Regulation on FDI From 1st January, 2003 EU-conform regulation in force Implementation • Direct Incentive for Investments 1. Economic Competitiveness Operative Program (ECOP) 2. Special incentive package for strategic investors3. Subsidy for employment creation and training • Indirect Incentives1. Tax-related Incentives2. Offset programs

12. Access to EU Structural Funds: Tender applications co-financed by the European Union I. Economic Competitiveness Operative Program • 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.)

13. Access to EU Structural Funds: Tender applications co-financed by the European Union II. Economic Competitiveness Operative Program • Non-refundable grants are available for small and medium enterprises up • to 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.)

14. 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.

15. Indirect Incentives Tax-related incentives • 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

16. UA UA V SK SK Tornyosnémeti Tornyosnémeti M25 M25 LVOV, KIJEV LVOV, KIJEV felé felé Tisza A Tisza A POZSONY, POZSONY, M30 M30 Miskolc Miskolc IV M3 M3 PRÁGA PRÁGA Salgótarján Salgótarján felé felé Nyíregyháza Nyíregyháza M35 M35 M2 M2 BÉCS BÉCS M15 M15 V Parassapuszta Parassapuszta Emőd Emőd Polgár Polgár felé felé Eger Eger M3 M3 Duna Duna Győr Győr Vác Vác M9 M9 Füzesabony Füzesabony M1 M1 M8 M8 RO RO Sopron Sopron M8 M8 Tatabánya Tatabánya Debrecen Debrecen BUDAPEST BUDAPEST M4 M4 Szombathely Szombathely M0 M0 Szolnok Szolnok Székesfehérvár Székesfehérvár Veszprém Veszprém M4 M4 M6 M6 IV GRÁC GRÁC Dunaújváros Dunaújváros felé felé ARAD, ARAD, Rábafüzes Rábafüzes Zalaegerszeg Zalaegerszeg M44 M44 M43 M43 SLO SLO K O L O Z S V Á R K O L O Z S V Á R Kecskemét Kecskemét LJUBJANA, LJUBJANA, M7 0 M7 felé felé Bszgyörgy Bszgyörgy Békéscsaba Békéscsaba TRIESZT TRIESZT Lelle Lelle Kiskunfélegyháza Kiskunfélegyháza Nagykanizsa Nagykanizsa felé felé M7 M7 V Tornyiszmiklós Tornyiszmiklós M5 M5 ARAD ARAD HR M9 HR M9 M56 M56 YU YU felé felé Szeged Szeged Letenye Letenye ZÁGRÁB ZÁGRÁB Szekszárd Szekszárd Kaposvár Kaposvár Nagylak Nagylak felé felé V/A Baja Baja Mohács Mohács IV TEMESVÁR, TEMESVÁR, Röszke Röszke Pécs Pécs V BUKAREST BUKAREST Helsinki corridors motorway network in 2002Network expansion in 2003-2006: highway motorway highway under connstructionmotorway under constructionmhighway under preparationmotorway under preparation BELGRÁD BELGRÁD felé felé felé felé Ilocska Ilocska X/A SZARAJEVÓ SZARAJEVÓ felé felé V/C Rapid Development of Transport Infrastructure KASSA felé • 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

17. 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 • Expected North-Southern Pan-European transport corridor • along M2 and M6 motorways • M5 and M43 motorways European Initiative for Growth • 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 Local developments

18. Development of Railway and Air Transport Infrastructure 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 • 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 Air transport

19. Contacts Ministry of Economy and Transport Ábel Garamhegyi, Director-General for Investments and Economics H-1055 Budapest, Honvéd utca 13-15. Phone: (36 1) 374-2746 Fax: (36 1) 374-2726 E-mail: garamhegyi@gkm.hu Internet: www.gkm.hu The Hungarian Investment and Trade Development Agency (ITDH): “One-stop-shop” for investors Ádám Terták, Chief Executive Officer H-1061 Budapest, Andrássy út 12. Phone: (36 1) 472-8100Fax: (36 1) 472-8101 E-mail: tertak@itd.huInternet: www.itdh.hu