Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the cases 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 (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 4 November 2024.

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.

For the updated rating report accompanying this review, click here.

Key rating factors

Luxembourg’s AAA ratings reflect: i) a wealthy, competitive and high value-added economy; ii) strong public finances, characterised by low debt, a good record of fiscal prudence, and a resilient public debt structure; and iii) a strong external position reflecting its significant net external creditor position. These factors contribute to Luxembourg’s economic resilience and ability to face future shocks, as demonstrated during recent crises.

The ratings are constrained by: i) exposure to adverse external developments as a small, open economy; ii) financial vulnerabilities linked to imbalances in the real estate market, elevated private debt levels and an outsized financial sector; and iii) long-term fiscal pressures linked to population ageing and a generous social welfare system.

After a 1.1% contraction of GDP in 2023, Scope expects economic output to increase by 1.4% this year, driven by improving household consumption that is underpinned by robust real wage growth and supportive fiscal policy. Growth is expected to accelerate further to 2.6% in 2025 driven by still-robust consumption dynamics and a gradual recovery in investment activity, supported by loosening financial conditions.

Scope expects the fiscal deficit to widen somewhat this year to 1.0% of GDP (up from 0.7% of GDP in 2023). Government revenue growth has decelerated, notably reflecting the effects of normalising price dynamics and of revenue-reducing policy changes (including the revaluation of personal income tax brackets and tax credits aiming at boosting the construction sector). At the same time, expenditure growth remains above revenue growth in 2024, fuelled by the automatic indexation of public sector wages and social transfers. Scope expects the deficit to rise to 1.2% of GDP in 2025 due to persistent inflation-related pressures on spending, the partial extension of energy-support measures and the roll-out of the “Entlaaschtungs-Pak” fiscal support package (estimated budgetary impact of about 0.5% of GDP). Scope forecasts the debt-to-GDP ratio to rise to 27.9% by year-end 2025, up from 25.5% last year, thus remaining among the lowest in the euro area.

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

The ratings could be downgraded if, individually or collectively: i) the growth outlook deteriorated substantially; ii) fiscal fundamentals weakened significantly; and/or iii) vulnerabilities in the financial system emerged, with significant negative implications for the macro-economic stability.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 29 January 2024) 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 Brian Marly, Senior Analyst

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