General Motors will invest $655 million to expand capacity at its Opel factory in Hungary and Volkswagen's Audi may also expand production at its plant, both seen as boosting investor sentiment toward the country.
Analysts said the Opel announcement on Tuesday was positive for investors holding Hungarian assets and Hungary, which has been a laggard in foreign direct investment (FDI) flows in recent years and where boosting the growth potential is one of the center-right government's key priorities.
They said the project could show up in GDP figures in the short-term by boosting investments, while its impact on the current account would likely be two-sided: higher imports worsen the trade balance but the investment can help improve the financing side.
Separately, website Magyar Hirlap reported on Tuesday that Hungary and Audi VOWG_n.DE would sign an agreement this week for Audi to expand production at its Hungarian plant. Audi recently bought a plot of land next to its existing plant in Gyor, northwestern Hungary.
Foreign direct investment inflows in Central Europe have fallen since 2008. Aside from GM's expansion, the only other big project in Hungary is Daimler AG's 800 million euros ($1 billion) plant, which will employ 2,500 workers from 2012 in the central Hungarian town of Kecskemet.
I won't say that our fate and the fate of the auto industry is one and the same, but it is clearly visible that the economic cycles (of the two) are interconnected, Hungarian Prime Minister Viktor Orban told a news conference.
I think the present investment of Opel heralds the coming successes of the Hungarian economy.
Orban said the government would subsidize the GM investment and specify the details of the support in a contract which both parties would finalize by mid-October.
Hungary's heavily export reliant economy contracted by 6.3 percent last year and is expected to grow by 0.9 percent this year. The government hopes growth could pick up to 2.5-3.0 percent next year as the economy rebounds.
The new Opel plant will offer 800 jobs and at full capacity in 2015 will have an annual output of 500,000 units.
The forint firmed past 280 to 279.65 to the euro which dealers said was mostly due to better global sentiment and risk appetite, rather than the investment plans. The level of 279.60/280 is seen as an important technical level.
Cars and car parts are a key component of exports and industrial production in Hungary and other Central European emerging economies, but the industry took a big hit in the global crisis and scaled back production in many places.
Gillian Edgeworth, an economist at Hypovereinsbank/Unicredit said the announcement was a boost to confidence in Hungary at a time when the country is struggling to cut its 2011 budget deficit to a European Union required level, below 3 percent of GDP.
Competition for FDI in the region is strong -- that Hungary can manage to win a piece of the pie at a time when investors are nervous about the economic and political backdrop is positive, Edgeworth said.