The triple A rating is the highest possible score on both rating agencies’ scales, indicating an exceptionally high credit profile with little exposure to credit risks. A good credit rating attests to a borrower’s creditworthiness and ability to obtain credit under favourable terms.

Credit rating agencies, Fitch and Scope Ratings, recently affirmed Luxembourg’s AAA credit rating with a stable outlook, indicating that the rating is unlikely to change.

This affirmation reflects Luxembourg’s economic resilience regardless of the economic challenges on a European and global scale, as well as the country’s strong public finances, prudent fiscal management, and good governance.

“The confirmation of the highest ‘AAA’ rating by Fitch is excellent news,” said Luxembourg Minister of Finance Yuriko Backes about the Fitch rating, which she describes as “an illustration of the resilience and performance of our economy, even in these times of polycrisis. It testifies to the soundness of the government’s responsible fiscal policy and the measures taken to strengthen household purchasing power and support businesses.”

Fitch’s AAA credit rating: excellent public finances, resilient labour market

The AAA affirmation by Fitch was published on 13 January 2023.  The agency attributed Luxembourg’s AAA status to its strong credit fundamentals, which are backed by excellent public finances, good governance, a resilient labour market, and a well-capitalised banking industry, all contributing to its resilience and capacity to withstand the effects of a more restrictive European Central Bank monetary policy.

According to Fitch, the recent high levels of inflation brought on by high energy costs will decline along with the general trend in European gas prices. It predicts that inflation would start off at 3.9% in 2023 and then fall to 2.4% in 2024. The latest forecasts by Luxembourg statistics agency STATEC anticipate a similar trend for 2023 at 3.4% but expects inflation to remain relatively high at 4.8% in 2024.

Increased public spending is expected to serve as a buffer, in the scenario of an economic decline, and sustain investment growth. Fitch predicts support measures could trigger minimal fiscal deficits of 2.4% of GDP in 2023. A meagre 0.5% drop in real GDP growth this year compared to 2022 is envisaged by the agency.

Minister for Finance Yuriko Backes presents the economic situation of LuxembourgThis rating is an illustration of the resilience and performance of our economy, even in times of polycrisis.

Simultaneously, public debt is expected to remain low in 2023, at 26.5% of GDP, the lowest among AAA-rated sovereigns and lower than Luxembourg’s 30% threshold. Stricter ECB monetary measures is expected to keep impacting the volume of real estate transactions and prices, although the rating agency notes that a significant decline in real estate prices is not foreseen, and the banking sector’s exposure is “relatively moderate”. This year’s national and local elections are not expected to disrupt Luxembourg’s standard of peaceful political transitions and do not pose a risk. The World Bank’s high rating of governance quality (96.8%) attests to this, as does Fitch’s ESG relevance score of 5+ for political stability.

Exposures to a lower-than-projected growth in Europe, potential energy price shocks, pressure from a tight labour market, further inflationary pressures, and fiscal deficits following robust relief measures, were some underlined areas for attention.

Fitch confirmed the European Union’s and the European Atomic Energy Community’s (Euratom) AAA ratings on 14 February 2023 with a stable outlook, citing the financial prowess of AAA-rated member states such as Luxembourg, Germany, the Netherlands, Sweden, and Denmark as a primary reason for the affirmation.

Scope’s AAA rating: impressive public finance record, competitive economy

On Friday 27 January 2023, Scope Ratings newly published report affirmed Luxembourg’s AAA credit rating with a stable outlook, highlighting the country’s economic resilience as evidenced by an impressive public finance record marked by low debt and previous fiscal surpluses, good external positioning, and a competitive economy.

The agency notes Luxembourg’s rapid economic recovery in the 2020 to 2021 period. Although the war in Ukraine caused an initial sharp rise in inflation in early 2022, it has been on the decline since its peak in June 2022. During COVID, government support measures and fiscal surpluses helped to sustain private consumption and residents’ purchasing power. Luxembourg’s fiscal outlook remains positive, owing to several “fiscal buffers” capable of sustaining revenue growth and mitigating future shocks.

Three key areas for attention were identified in the report: Luxembourg’s sensitivity to macroeconomic swings and risks from the external environment, long-term spending pressures, and financial sector vulnerabilities on a local and global level.

Nonetheless, Scope emphasises the history of the nation’s healthy public finances, which are characterised by budget surpluses, and predicts that public debt will remain below the 30% threshold. Furthermore, it forecasts that GDP growth would remain strong through 2023, increasing to 2.2% from 2.0% in 2022, and possibly reaching 2.5% in the long run.

Minister Yuriko Backes referred to the triple A rating by Scope as “a testament to the government’s responsible fiscal policy”. She explains that “the assessment underlines the effectiveness of the packages of measures, implemented by the government in close consultation with the social partners, to support households and businesses.” The Minister adds that she “will continue to work to maintain sound public finances, which are the key to a resilient and prosperous economy”.

In their most recent analysis, rating agencies Moody’s, S&P, DBRS Morningstar, and Creditreform also assigned Luxembourg a triple A rating with a stable outlook.

Photo credit: Cedric-Letsch, Unsplash

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