Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Grand Duchy of Luxembourg (AAA/Stable; S-1+/Stable) on 3 December 2021.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with 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 demonstrated remarkable resilience during the Covid-19 crisis, 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-calibrated reopening in Q3 2020. As such, the Covid-19 pandemic has had a relatively mild impact on Luxembourg with real GDP shrinking by only 1.8%. The large fiscal package combined with the contraction in GDP pushed the general government debt-to-GDP ratio to 24.8%. Scope expects debt to stabilize at 26% of GDP in 2022-23 and the fiscal balance to turn positive by 2023. Low and stable debt combined with a return to fiscal surpluses reflect Luxembourg’s commitment to fiscal discipline and good record of prudent budgetary policies. As such, Luxembourg maintains ample fiscal buffers to face future shocks. The economy’s exposure to developments in the external environment, including in 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 report accompanying this review, click here

The methodology applicable for the reviewed rating(s) and/or rating Outlook(s) (Sovereign Ratings, 8 October 2021) 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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