Are you sure?

Will confidence in companies trump the China effect?

In an exclusive interview with the Budapest Business Journal, PwC Hungary country managing partner Nick Kós looks at the current state of Hungary Plc., state administrative reform, and likely future pressures on the economy.

When we spoke last year (May 2014), you said you saw a definite positive shift in terms of international sentiment towards the Hungarian market. How do you view the Hungarian economy now? Is that sentiment still there?

It is still there and it does still have an impact. The government seems to be committed to deliver on some of these things that may have been seen to be holding the country back; we see a pick up in investment for sure, the bad press has died away, recent emotive events aside, and the economy has been performing very well, against its peers and against most measures. So I think that optimism has been reasonably well founded, and we continue to see that reflected in our CEO survey. Certain moves by the government have started to support the idea that we are trending in a more positive direction. The banking situation is an interesting example because, at first, it was all about the bank taxes and what was being forced on the banks, but the solution that was found, together with the rulings from the Supreme Court, seems more beneficial to the banks than what was originally anticipated. There are now positive moves being made towards the banking tax – and other taxes in some of the other areas – so things have improved there. There have been a number of transactions in the banking sector as well. So from what was a very difficult industry sector, certainly in terms of the press the Hungarian government was getting, there have been a number of significant changes that have improved that image and supported the view that the government is willing to make a positive change.

Transparency and stability are what interest international businesses. The government has slowed down its legislative pace in this latest term, but it hasn’t lost its ability to surprise – and fundamentally alter – the markets, such as with the unexpected and rapidly implemented Sunday trading regulations. Do you get a sense the government understands the concerns of business?

When we look at our CEO survey, the most important thing for CEOs is an internationally competitive and efficient tax system. And certainly when we look at the állam reform, the government administrative reform initiative, it is focused on exactly that. The Sunday trading thing is one of the few where the government has rush-passed a regulation. We have come a long way from the first term where it seemed every week we had a rash of new regulations; that’s a positive trend. In the U.K. they are going the opposite way: they are moving to Sunday trading from a situation which was similar to what we have in Hungary now, and there’s a bunch of people who aren’t happy about that either.

In the wake of the Brokergate scandal, the government said it planned to freeze the assets of firms caught up in suspected financial wrongdoing. To most people on the outside, that probably seems reasonable enough, but the Chamber of Hungarian Auditors has raised concerns that auditors, too, could be involved, although they are not responsible for the decisions taken at companies that come under suspicion. What is PwC Hungary’s view, and how damaging in general has Brokergate been for the investment environment?

There has been a regulatory process review through the European Union over the past few years, and to some extent this regulation probably goes beyond some of the recommendations of the EU. Nonetheless, we will work with the regulation we have: it does try to deal with the issue that the quality of the audit is not always what it should be. But I think we also have to be careful that we don’t get into a situation where the auditors’ role is misunderstood or they become a scapegoat.

Clearly we support regulation that strengthens the ability and the capability of auditing firms and auditors, through the extent of professional training for example, so ensuring a quality audit.

When people lose money in a situation like that it has a negative impact on further investment; people’s sense of risk is heightened. It is important that investors have access to a market that is well developed, and regulated with processes in place that help limit risk, or at least help people to understand the risk they are taking when they invest.

Hungary has been committed to the adoption of International Financial Reporting Standards (IFRS) since it became a member of the EU. In early summer it was announced IFRS would be available to businesses that want to use it in 2016, and mandatory from 2017. Why is this important?

It is good from a cost and efficiency point of view for those companies that have group reporting in IFRS and then statutory (local) reporting. It is beneficial in reducing the duplication of effort, and this will move into the tax sphere as well because IFRS can form the basis for your tax reporting too, which is a positive and important step. Some other Hungarian companies won’t use this option, so they won’t be affected at all and won’t have to incur the cost of transition. Besides the simplification for current dual reporters there are other benefits to the transparency of IFRS that give you access to the capital markets more easily, so it is a very positive step, I would say.

Preparations are underway for the fifth PwC Hungary’s CEO survey. Have there been any surprises in the way the predicted trends developed in 2015, and what do you think might be the trends identified for next year?

I think what has been interesting is that we continue to see a high level of optimism with Hungarian CEOs. We had seen a big uptick in confidence about the global economy – up to 64% from 26% – in 2014, the third Hungarian CEO survey, and also in the Hungarian economy, by the way, which was quite pleasing. What we saw this year was a big drop in optimism around the global economy from 64% down to 46%, which is a bit of a worry, with a smaller drop in confidence in the Hungarian economy from 55 to 51, but with a really strong level of optimism around CEOs own companies’ prospects. That is sort of surprising, that the increased optimism about the economy has faded but there is still strong confidence in the capabilities of their own companies. And what was maybe unexpected is that optimism in the Hungarian economy is greater than the confidence in the global economy.

This year it will depend somewhat on the timing. We have had a lot of nerves and jitters about China, and how that impacts the global economy will be interesting to see. Hungary’s GDP growth last year was impressive, though there is a fall off expected this year; at the beginning of the year I felt that fall off was overstated and we would continue to have strong growth of 3% or even above, but now I am not so sure. I expect China and general economic concerns to have a downward impact on confidence in the economy, both globally and in Hungary too. What will be interesting is whether the CEOs’ confidence in their own performance can withstand the continued downward pressure on optimism about the economy.

What are the general challenges in the next 12 months and what role will PwC play in meeting those.

From the foreign direct investment point of view, I would hope that is an area where the level of activity increases because of all the things we have talked about. If so, then clearly there is a significant role for us to play in whatever type of investment decisions are being made globally: Helping people get comfort around acquisitions they are making; helping them to get comfortable about the regulatory and tax environment.

Secondly, in the public sector there are a lot of initiatives, from government reform to nationalization and then subsequent privatization in the banking sector. These are all big challenges for the state, and certainly an area where we see a need for support from firms like ours with global reach and expertise. In administrative reform, seeking consistencies and efficiencies in integrating public administration to make interactions with public and business more efficient and effective is something where we also see a role for the likes of PwC.

The third thing – and maybe one of the more important – is that we continue to support local businesses as we see the evolution of the Hungarian entrepreneur into developing Hungarian-based businesses of scale that are acquiring and consolidating in Hungary and looking further afield. A very important part of our development as a firm is interacting with and supporting Hungarian businesses to a greater extent.

Corporate Social Mobility

A pair of PwC-branded Nissan Leaf electric cars has been buzzing around the streets of Budapest since March. One serves as a courier vehicle, the other provides an alternative to taxis and rental cars for getting staff to meetings. Country managing partner Nick Kós explains the motivation behind acquiring the vehicles.

“They are part of a socially responsible approach to mobility. It is a combination of things: Fuel efficient electrical cars, which we have become familiar with through our work in the energy sector and with Smart City; cycle racks and shower rooms at work; we have discounts on the Bubi bicycle rental scheme; and we have a number of other initiatives to make it easier for our people to commute around in a way that is more environmentally friendly. It is something we are quite proud of. We don’t have a large fleet; they are basically our two company cars. We also encourage the teams to use them on a rotational basis so they become familiar with them as a fuel-efficient alternative.”