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 10 July 2023.

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 and professional services, or information and communication technology. These factors underpin a solid medium-term growth potential, which Scope estimates at 2.5% annually, and contribute to Luxembourg’s economic resilience. In addition, the country has sound public finances, with a very low debt and ample fiscal buffers, both illustrating the country’s history of 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 and cost-of-living crises, thanks to the government’s large and multi-pronged fiscal support package, a favourable economic structure, and large wealth buffers. Growth has slowed amid the cost-of-living crisis due to rising prices and associated tightening in monetary policies, and a weaker external environment. Still, Luxembourg maintains ample fiscal buffers to face the shock and has appropriately provided near-term support to firms and households. As a result, the public finance outlook has weakened in recent months, but Luxembourg maintains its sound fundamentals and has ample room to support its economy under current conditions. Scope projects the country’s public debt ratio to reach 28% by 2028, 6pps of GDP above pre-Covid levels.

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

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced.

The rating/Outlook could be downgraded if, individually or collectively: i) Luxembourg’s economic outlook and/or fiscal fundamentals deteriorate substantially due to a severe shock; and/or ii) vulnerabilities in the financial system were to weigh on the country’s macro-economic stability.

The methodology applicable for the reviewed ratings and rating Outlooks (Sovereign Rating Methodology, 27 September 2022) 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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