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Hungary Needs to Bring Predictability: US Ambassador

Hungary's government is taking steps to pull the country out of the difficult economic conditions it still faces but it needs to ensure predictability, Eleni Tsakopoulos Kounalakis, US Ambassador to Hungary, told CNBC.com.

Eleni Tsakopoulos Kounalakis, US Ambassador to Hungary
Eleni Tsakopoulos Kounalakis, US Ambassador to Hungary

Shortly after it came to power in 2010, conservative Prime Minister Viktor Orban's government introduced a flat, 16 percent income tax to boost growth and catch up with other countries in the region that had implemented this measure.

But in a move that some analysts and opposition members see as an U-turn on the policy, the Economy Ministry said that those earning monthly incomes of over 202,000 forint ($950) will have to pay a "temporary contribution" on top of the flat tax to compensate those made worse off by it, according to a Bloomberg report last week.

Government spokesman Peter Szijjarto denied in subsequent media reports that the tax on higher incomes amounted to a reversal of the flat tax policy.

"Clearly they are doing some experimental and unorthodox things to try and close their budget gap. And some of those things have not come out necessarily the way that they hoped," Kounalakis said in an interview in the Hungarian capital Budapest.

On Wednesday, another report said that the government is preparing more tax rises. According to Dow Jones newswire which quoted news website origo.hu, the government plans to change corporate taxation regulations, slap strict taxes on gambling and revise the fees on vehicle purchase and ownership and the taxes on personal income.

Investors' Dilemma

Investors are watching developments in Hungary - which also sparked the rage of some foreign banks recently by introducing legislation allowing some individuals who borrowed in foreign exchange to pay their loans back at below market rates – to see whether they should adjust their investment plans in the country.

There has been some talk of companies cutting down on investment because of the uncertainty caused by the government's reforms in the past year, which have also included nationalizing around $14 billion from private pension funds and imposing big taxes on banks and other companies.

But the US ambassador said investors are still waiting to see whether the government will eventually offer some stability.

"The main message from foreign investors is that it is difficult to make decisions about future growth in Hungary during a time of uncertainty. That's true in Hungary, it's true anywhere," Kounalakis said.

"That doesn't mean that everybody is holding back on decisions and we have seen some advances and increases in foreign investment but in general I would say that uncertainty has created a wait-and-see attitude."

"I have heard some of that," she said when asked whether any companies said they would cut down on investment or leave the country. "But it's really I've heard much more a wait-and-see attitude for new growth or new companies coming in."

"Certainly a lack of predictability impacts companies that are here and they have expressed concerns to us as well, but I think that as time goes by that level of concern has to some degree abated because it's been a year since the new government has been in place."

Hungary Still Attractive

The government has taken difficult steps in reforming the economy, which went through a deep recession as the global crisis caused by the credit crunch hit Central and Eastern Europe back in 2009.

Eastern Europe - A CNBC Special Report
Eastern Europe - A CNBC Special Report

"Although it's been very difficult, as it has been for many countries, they have tackled their problems with ambition and a lot of hard work and they are making their way out of the crisis," Kounalakis said.

Orban's government, which renounced a bailout agreement with the International Monetary Fund, the World Bank and the European Union set up during the crisis to shore up the country's finances, is pleased that it is now raising money from the markets successfully, she added.

Hungary has a lot going for it and American companies have invested more than $9 billion in the country since 1989, Kounalakis pointed out.

Among the advantages, she listed the country's infrastructure, not just roads or telecommunications but also beautiful cities and towns for companies to set up in, the highly skilled, talented and reliable workforce and the country's location in Europe.

"Finally, when you look at the cost of doing business here compared to comparable places in this general region, it's still very competitive," the US ambassador said.

Hope for Spring

The embassy is working with the Hungarian government on measures to encourage small and medium-sized enterprises, which in the US make up around 90 percent of gross domestic product.

"A lot of that has to do with cutting red tape, providing information on how to start a business in Hungary and how to comply with regulations for starting businesses," she explained. "Attempting to put as much of that online and making it as easily accessible as possible for entrepreneurs is another key element."

Despite the hardships and the government's radical changes, there are sectors in Hungary that function very well, according to Kounalakis.

"There is a very vibrant shared services sector that exists here, manufacturing is doing quite well and I would say that the manufacturing sector is the one industry that is managing perhaps to have more predictability than others and then, it's often overlooked, but in fact the entertainment industry here is pretty good," she said.

Kounalakis added that uncertainty was a prominent feature throughout Europe and the global economy and that she hoped next year Hungary will offer more certitude to investors.

"The government is bringing through quite a few reforms between now and January 1 and so it's my hope that by spring we'll see a renewed climate of predictability in Hungary," she said.