Rating action

Scope Ratings GmbH (Scope) has today affirmed the Grand Duchy of Luxembourg’s (Luxembourg) long-term issuer and senior unsecured debt ratings in local- and foreign-currency at AAA. The agency has also affirmed the short-term issuer ratings at S-1+ in local- and foreign-currency. All Outlooks are Stable.

The affirmation of Luxembourg’s AAA ratings reflects a wealthy and competitive economy, underpinned by high valued-added sectors and institutional strengths, supporting robust economic growth. The ratings are further supported by strong public finances, reflecting prudent fiscal management, and a strong external position.

The ratings are constrained by Luxembourg’s small, open economy, which raises its exposure to potential adverse external developments, alongside financial system vulnerabilities stemming from an outsized financial sector and high private debt levels, and long-term fiscal pressures linked to population ageing.

For the updated rating report, please click here.

Key rating drivers

Wealthy, competitive and high value-added economy

Luxembourg’s credit ratings are supported by its wealthy and competitive economy, underpinned by its status as a global financial centre. The country has one of the highest GDP per capita globally, at an estimated Int$ 149,600 (at purchasing power parity) in 2024, providing material buffers to shocks despite the small size of the Luxembourg economy. Its institutional strengths, including an attractive business environment and a stable, effective policy framework, further support economic resilience, as displayed during the Covid-19 pandemic which caused a comparatively mild recession followed by a swift rebound.

Economic output contracted in 2022-23, in the wake of Russia’s full-scale invasion of Ukraine and the subsequent rapid rise in inflation and interest rates. The Luxembourg economy experienced a partial recovery in 2024, with annual real growth edging up to 1%. Targeted intervention from authorities, particularly aimed at the construction sector and households, alongside the cushioning effect of automatic stabilisers, avoided scarring effects on potential output.

Scope expects growth to accelerate to 2.4% this year and to 2.5% in 2026. The recovery will be supported by an improving housing market and strengthening business investment dynamics amid declining lending rates. Medium-term growth prospects, with growth forecast to average 2.4% over 2026-29, are anchored by solid investment dynamics, in part benefitting from robust levels of public investment, expected to remain above 4% of GDP in the years ahead.

Scope sees material downside risks to this outlook, however, in line with potential headwinds stemming from high global financial volatility and weaker external demand in the present context of heightened geopolitical and trade policy uncertainty.

Strong public finances, characterised by a record of fiscal prudence and low indebtedness

The AAA ratings are also underpinned by Luxembourg’s strong fiscal fundamentals. The country has a record of exceeding medium-term budgetary targets and achieving consistent budgetary surpluses (averaging 2.1% of GDP over 2015-19). After weakening to a comparatively moderate 3.1% of GDP deficit in 2020 (against a euro area average of 6.6%), Luxembourg’s headline fiscal balance returned to surpluses in 2021-22 (averaging 0.6% of GDP) thanks to a strong rebound in revenues and the phase-out of Covid-19 related measures. The fiscal balance weakened to a moderate deficit in 2023 of 0.8% of GDP primarily due to additional outlays related to energy support measures and the revaluation of public sector wages and social transfers.

Luxembourg’s fiscal balance improved markedly in 2024, with an estimated 1% of GDP surplus, significantly outperforming previous Scope forecasts of a 1% of GDP deficit. The shift reflects stronger-than-anticipated revenue growth and lower-than-expected spending despite persistent inflation indexation-related spending pressures and the partial extension of energy-support measures.

Looking ahead, Scope anticipates a return to moderate, stable fiscal deficits, averaging 0.6% of GDP over 2025-29. This trajectory accounts for commitments to maintain capital spending at elevated levels, expectations of normalising current expenditure growth and of still-robust revenue dynamics amid healthy economic growth and despite the revenue-reducing impact of recently implemented policies. These primarily relate to measures included in the “Entlaaschtungs-Pak” fiscal support package (estimated budgetary impact of about 0.5% of GDP annually), including the revaluation of personal income tax brackets and the reduction of the corporate income tax (CIT) rate.

Downside risks relate to increased spending pressure on defence (presently forecast to increase only moderately to 2% of gross national income by 2030, from 1.3% in 2024). Further vulnerabilities stem from a high reliance on CIT receipts, accounting for around 12% of central government revenue, and particularly on the financial sector which accounts for around two-thirds of total CIT receipts. In this regard, Scope notes positively that ongoing efforts aimed at modernising the tax administration should enhance revenue collection and visibility.

Luxembourg’s record of prudent fiscal policies has resulted in the government having one of the lowest debt-to-GDP ratios of the euro area, at an estimated 26.3% as of end-2024. Low budget deficits and resilient economic growth should keep the debt ratio stable over the medium run at about 26% until 2029 under Scope’s projections - just 3.7pps above pre-pandemic levels. Gross financing needs are expected to remain durably above pre-pandemic averages, but still very low compared with peers at about 3-4% of GDP annually over 2025-29. Strong debt affordability is anchored by a favourable debt structure, characterised by low funding costs (average interest rate of around 1.9% in 2024), comfortable average maturity (7.3 years) and no foreign currency exposure.

Luxembourg’s debt-to-GDP trajectory is resilient to a stressed scenario of protracted economic slowdown and persistent fiscal slippages, remaining well below the EU’s 60% Maastricht threshold.

A strong external position reflecting its significant net external creditor position

Finally, the AAA ratings are bolstered by a strong external position. Luxembourg has consistently generated large current account surpluses, averaging 7.3% of GDP over 2015-19. Sustained current account surpluses have resulted in a large positive net international investment position of around 38% of GDP as of end-2024. The current account surplus rose to a record high 13.8% of GDP last year, up 2.5pps from the previous year amid still-sluggish domestic demand and sustained, elevated services export surpluses. Scope expects the current account surplus to normalise over the coming years, all the while remaining elevated, converging to around 7.0% of GDP over a forecast horizon up to 2029.

Rating challenges: exposure to external developments, long-term age-related spending pressures, elevated financial sector vulnerabilities.

First, as a small, open economy (export and import sectors account for around 200% of GDP) with a large, globally interconnected financial sector, Luxembourg is subject to macro-economic volatility and exposed to external developments. Elevated geopolitical tensions remain a risk with potential repercussions on regional supply chains and world trade. Although direct trade linkages with the US are limited, the fallout of the US trade policy shock is likely to impact the Luxembourg economy due to indirect exposures via its main euro area trading partners, the largest being Germany.

Second, Luxembourg faces substantial long-term age-related spending pressures. It is expected to register one of the largest increases in age-related expenditure (pensions, healthcare, long-term care, education) in the EU, estimated at 4.4pps of GDP between 2022 and 2050 (versus an EU aggregate of 1.1pps)¹. While demographic trends compare favourably to rating peers, particularly as regards working-age population growth, this adverse trajectory primarily reflects a generous social security system, with high replacement rates and a comparatively low effective retirement age. Importantly however, Scope notes that the pension system remains in a comparatively strong position, having accumulated a EUR 27.4bn financial reserve by the end of 2023 which covered more than four years of outlays (above a minimum threshold set at 1.5 years)². Scope views positively ongoing consultations around a potential reform of the pension system to ensure its long-term financial sustainability.

Finally, financial vulnerabilities linked to the evolution of the real estate sector and elevated private debt levels amid tighter monetary policy remain at an elevated level. Total banking sector assets amount to around 11 times annual GDP, which could lead to contingent liability risk for the government under adverse scenarios. Luxembourg’s position as a global centre for non-bank financial intermediation raises its vulnerability to ongoing volatility in global financial markets, though the final exposure of its domestic economy is comparatively limited in view of the primarily cross-border nature of associated investment flows. Household indebtedness remains among the highest in the EU, equivalent to 62% of GDP, presenting a degree of risk for financial stability if households’ debt-servicing capacity were to deteriorate, such as due to a material weakening of labour market dynamics. Scope notes, however, that the recent correction observed in residential real estate prices – among the sharpest in the euro area – did not lead to material increases in financial sector risk indicators. Financial sector resilience is supported by effective oversight frameworks, high household wealth and high capital and liquidity buffers, as noted in the IMF’s latest Financial Sector Assessment Program³.

Outlook and rating sensitivities

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

Downside scenarios for the ratings and/or Outlooks are (individually or collectively):

1. the medium-term economic growth outlook deteriorated significantly;
    
2. financial stability risks increased materially, threatening macro-economic stability;
    
3. the fiscal outlook weakened, resulting in a significant increase in government debt.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s Sovereign Quantitative Model (SQM) provides a first indicative credit rating of ‘aa+’ for Luxembourg. This ‘aa+’ first indicative rating receives a one-notch uplift from the SQM’s reserve-currency adjustment and no negative adjustment from the political-risk adjustment. This results in a final SQM indicative credit rating of ‘aaa’ for Luxembourg. On this basis, the final SQM quantitative rating of ‘aaa’ is reviewed by the Qualitative Scorecard (QS) and can be adjusted by up to three notches depending on Luxembourg’s qualitative credit strengths or weaknesses compared against a peer group of sovereign states identified by the SQM.

Scope identified the following QS relative credit strengths of Luxembourg: growth potential and outlook. Conversely, Scope identified the following QS relative credit weakness for Luxembourg: i) macro-economic stability & sustainability; and ii) financial imbalances. On aggregate, the QS generates no adjustment for Luxembourg’s credit rating, resulting in the final AAA long-term ratings. A rating committee has discussed and confirmed these results.

Factoring of Environment, Social and Governance (ESG)

Scope explicitly factors in ESG issues in its ratings process vis-à-vis the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

With respect to environmental factors, Luxembourg’s quantitative scores are strong in terms of the CO2 intensity of its economy (as measured by emissions per unit of GDP) and as regards to natural disaster risks. However, these strengths are partially offset by the high footprint of consumption relative to available biocapacity, given the physical constraints of its geography, and some of the highest greenhouse gas emissions per capita in the EU. Its energy mix is mostly made up of fossil fuels (82% of total energy supply in 2023), owing to high demand for transportation fuels. It is also highly dependent on resource imports given its small, natural resource poor territory. The government targets an ambitious 55% reduction in greenhouse gas emissions in sectors not covered by the European Union Emission Trading Scheme relative to 2005 levels, above the 40% reduction required by the EU. It plans net-zero greenhouse gas emissions by 2050.

Regarding social factors, Luxembourg receives a higher score than peer countries, reflecting more favourable ageing-dynamics and similarly strong marks with regards to income inequality and labour force productivity. Social outcomes are strong in an EU context although poverty levels and income inequality have worsened over the past decade. The proportion of people at risk of poverty stood at 20.0% in 2024, up from 18.4% in 2015. While Luxembourg benefits from more favourable demographic dynamics than European peers, the generosity of its welfare system may result in growing fiscal pressures in the context of population ageing.

Finally, under governance-related factors captured by the SQM, Luxembourg holds high scores on a composite index of five World Bank Worldwide Governance Indicators, reflecting strong democratic institutions, with no negative adjustment under the political-risk assessment. Furthermore, Scope’s QS evaluation on ‘governance factors’ indicates Luxembourg is in line with the performance of ‘aaa’ indicative-rated sovereign peers, reflecting stable political conditions and broad consensus on key policy issues, including European integration and fiscal prudence. Luc Frieden took over as Prime Minister from Xavier Bettel after the elections in October 2023, as leader of a new coalition between the Christian Social People’s Party and the Democratic Party.

Rating committee
The main points discussed by the rating committee were: i) domestic economic risk; ii) public finance risk; iii) external economic risk; iv) financial stability risk; v) ESG-related risk; and vi) rating peers.

Rating driver references
1. European Commission - The 2024 Ageing Report
2. Inspection Générale de la sécurité sociale – La situation financière du régime général d'assurance pension
3. IMF - Luxembourg: Financial Sector Assessment Program-Financial System Stability Assessment

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 27 January 2025), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 4.0), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party Participation    YES
With access to internal documents                                   NO
With access to management                                            YES
The following substantially material sources of information were used to prepare the Credit Ratings: the Rated Entity, public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Brian Marly, Senior Analyst
Person responsible for approval of the Credit Ratings: Eiko Sievert, Senior Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 19 October 2018. The Credit Ratings/Outlooks were last updated on 24 May 2024.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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