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 Luxembourg (long-term local- and foreign-currency issuer and senior unsecured debt ratings: AAA/Stable; short-term local- and foreign-currency issuer ratings: S-1+/Stable) on 3 August 2022.

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

For the updated report accompanying this review, click here

Luxembourg’s AAA rating is underpinned by its wealthy economy with solid fundamentals underpinned by high value-added activities, competitive sectors such as financial services or information and communication technology. These factors are reflected in a solid growth potential estimated at 2.5% and contribute to Luxembourg’s economic resilience. In addition, the country has sound public finances, with a good record of fiscal surpluses and a low debt burden both illustrating a conservative fiscal framework and prudent budgetary management. Finally, the strong external position reflected in significant current account surpluses, a net external creditor position and underpinned by euro area membership is an important strength.

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, 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’s economy and public finances. The recovery has been strong with Luxembourg significantly outperforming expectations with real growth and the budget balance rising to 6.9% and 0.9% of GDP respectively in 2021. Rising inflationary pressures and supply-side bottlenecks, exacerbated by the war in Ukraine are weighing on the recovery, however. Growth is set to slow to 1.8% in 2022 and inflation to rise from 3.5% in 2021 to 5.6% as a result. Still, Luxembourg maintains ample fiscal buffers to face the shock and has appropriately provided near-term support to firms and households. As such the public finance outlook has weakened slightly in recent months but Luxembourg maintains its healthy fundamentals and has ample room to support its economy under current conditions. Scope projects its public debt to reach 27% by 2027, only 4.4pps of GDP above pre-crisis levels.

Rating challenges include: i) a small, open economy that is exposed to developments in global taxation frameworks and international financial markets; ii) long-term fiscal pressures linked to population ageing and generous social security systems; and iii) rising financial vulnerabilities from rapidly increasing real estate prices and elevated private debt levels.

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; ii) fiscal fundamentals deteriorate significantly; and/or iii) vulnerabilities in the financial system were to weigh on the country’s macro-economic stability.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Rating Methodology: Sovereign Ratings, 8 October 2021) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Thibault Vasse, Associate Director.

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