Luxembourg continues to benefit from the best rating from the three major rating agencies: S&P, Moody’s and Fitch.
Luxembourg’s credit profile remains strong, in spite of economic uncertainties related to tax and regulatory reforms. Moody’s notes that Luxembourg (AAA stable) benefits from robust growth prospects, as well as from a strong institutional framework.
The analysis highlights the open and innovative character of the Luxembourg economy, the positive effects of the “Zukunftspak” and the good supervision of the financial sector. In terms of potential risks, Moody’s mentions the long-term financing of the pension system and the relatively high weight of the financial sector in the Luxembourg economy.
The rating agency explains that Luxembourg benefits from a wealthy economy, solid institutions and very high fiscal strength, with low government debt and a long-standing track record of fiscal prudence and pro-active fiscal policies. The country has one of the highest per-capita-incomes in Moody’s sovereign rating universe.
Luxembourg’s debt burden — at 23.5% of GDP in 2014 — is low in comparison with AAA-rated peers. It is even lower if the country’s social security reserves of 28.5% of GDP are taken into account. These reserves could provide the government with a funding buffer during an unlikely period of financial market stress, adding to the strength of the government’s balance sheet.
Financial services have been the key driver of Luxembourg’s robust economic growth performance and are likely to remain the key sector of the economy for many years to come, in spite of efforts by the authorities to diversify Luxembourg’s economy. The sector currently accounts for 27% of the country’s gross value added, 12% of employment and 23% of government tax revenues.
Moody’s still expects that Luxembourg’s real GDP growth will be robust in the coming years compared to euro area peers, at 3% for 2015 and 2016. The changes in the financial sector’s regulatory and supervisory framework are also positive from a financial stability perspective.