Scope Ratings reviews its ratings either yearly, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations. Scope performs monitoring reviews to determine whether outstanding ratings remains proportionate. Monitoring reviews are conducted either by performing a portfolio review in terms of the applicable methodology/ies, latest developments, and the rated entity’s financial and operational aspects relative to similarly rated peers; or through targeted reviews on an individual credit. Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for Luxembourg (AAA/Stable; S-1+/Stable) on 22 June 2021. The review resulted in no action on the assigned ratings. This monitoring note does not constitute a rating action nor does it indicate the likelihood of a credit rating action in the short term. The latest information on the credit ratings in this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

Luxembourg’s AAA rating is underpinned by its i) high income per capita; ii) sound public finances and low debt burden due to its robust fiscal framework; iii) euro area membership and effective institutional framework; and iv) a strong external position reflecting its significant net external creditor position. Luxembourg has weathered the Covid-19 crisis well, thanks to the government’s large and multi-pronged fiscal support package, a favourable economic structure with strong performance in the ICT and financial service sectors, as well as a careful and well-calibrate reopening in Q3 of last year. As such, the Covid-19 pandemic has had a relatively mild impact on Luxembourg with real GDP shrinking by only 1.3%. The large fiscal package combined with the contraction in GDP pushed the general government debt-to-GDP ratio to 24.9%, remaining at very low levels highlighting Luxembourg’s very comfortable fiscal buffers. Looking ahead, continued support from ECB policies and strong economic fundamentals should facilitate a robust economic recovery. The economy’s exposure to developments in the external environment, including on the international tax regime, its reliance on the financial services sector, and imbalances in the housing market remain challenges.

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the next 12 to 18 months.

The rating/Outlook could be downgraded if, individually or collectively: i) Luxembourg’s economic outlook deteriorates substantially, for instance, due to tightening of global financial conditions or changes in the international tax regime; ii) fiscal fundamentals deteriorate meaningfully; and/or iii) vulnerabilities in the financial system were to weigh on the country’s macro-economic stability.

For the updated scorecards accompanying this review, click here.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Ratings, 9 October 2020) is available on https://www.scoperatings.com/#!methodology/list.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Thibault Vasse, Senior Analyst.

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