The forint, Hungary's currency, has not fared well this year. Meanwhile, FDI projects into Hungary, which averaged 12 per month in 2011, have averaged just seven per month in 2012, with 56 projects in the year up to August, according to greenfield investment monitor fDi Markets.  

The year has also seen heightened tension between Hungary and the EU, with the repressive actions of the authoritarian government of Viktor Orban on the one hand and the EU and the International Monetary Fund (IMF) refusing a loan on the other. The question is, is the political turbulence to be blamed for the decline in FDI?

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Volatile ground

According to one UK Foreign Office source, the two are connected because businesses do not like regulatory uncertainty. “Foreign investment is drying up because the government just uses its two-thirds majority to make all its decisions and that means unpredictable regulatory frameworks, for example, on taxes, on banks, on retail or in the energy sector,” the source says.

Mr Orban is the country's prime minister and head of the Fidesz Party, which swept to power in 2010 having won 68% of the parliamentary seats after the then-incumbent technocratic party failed to solve the problems caused by the 2008 financial crisis. Despite its liberal, anti-communist origins, the Fidesz Party has become increasingly right-wing and Mr Orban tends to play the populist card.

After 20 months in office, Mr Orban's government had created 360 new laws, which have challenged the independence of the judiciary, undermined voter registration and election procedures, and tried to put the central bank in government hands. This has led to a fall out with the EU – which Hungary joined in 2004 – and the IMF over Hungary’s request for a €15bn loan. The IMF was concerned about what the government was doing with the rule of law. Mr Orban rebutted by saying the EU was treating it like a ‘colony’. The argument is yet to be settled.

Wait and see

Mr Orban’s actions may have damaged Hungary’s international reputation. This is particularly important because the country's economy relies very heavily on FDI. In the United Nations Conference on Trade and Development’s Contribution Index, which ranks countries according to the importance of FDI to their economy, Hungary was placed first in 2011.

Of course, it is not all bad news and Hungary’s main sectors – automotive and electronics – have continued to see some investments. Renishaw, a UK-headquartered engineering company, began operating in central Europe, including Hungary, a decade ago. Rhydian Pountney, general manager for the company's international sales, says: “At the time we could see that central Europe was somewhere we wanted to be involved in as there is a lot of support we can give to the automotive and industrial sectors there. Hungary has a skilled workforce and is also a gateway for Romania and Bulgaria."We are acutely aware of the political issues of the regime but we take the long view and we are not likely to be scared off by the ups and downs of politics,” he says.

Something that the Hungarian population will be heartened to hear. However, as the FDI figures show, there are many more companies that are holding back investing in the country, at least until it reaches a resolution with the IMF.