Luxembourg's Ministry of Finance has confirmed that the rating agency Fitch has confirmed the AAA rating of the Grand Duchy of Luxembourg with a stable outlook: Luxembourg therefore retains the best possible rating.
Like Fitch, other rating agencies such as Moody's, Standard & Poor's and recently DBRS Morningstar assigned this rating to Luxembourg, once again confirming the country's good financial position thanks to its balanced budget approach.
Fitch has explained the AAA rating by Luxembourg's resilience to the shock of the COVID-19 pandemic, with real GDP having already returned to its pre-pandemic level in the fourth quarter of 2020. Thanks to the structure of the Luxembourg economy with, in particular, the relatively low weight of the intensive service sectors "in contact" and given the broad support deployed by the government in favour of businesses and households facing restrictions, Luxembourg has been able to overcome the crisis by posting a strong performance with relatively strong economy. Fitch forecasts GDP growth of +4.6% this year, followed by +3.0% next year and +2.3% in 2023. It expects the government deficit to fall to -2.3% of GDP this year and -1.6% in 2022 before falling to -0.8% in 2023.
The rating agency is convinced that public finances are the guarantor of the AAA rating. Fitch estimates that public debt could reach 28.3% of GDP in 2023, up from 24.9% in 2020. Nevertheless, Luxembourg's debt ratio would remain the lowest among its peers rated AAA by Fitch, and well below of the AAA median of 44% of GDP. The soundness of Luxembourg's finances also constitutes an additional safety cushion against a possible increase in expenditure linked to aging over the coming decades.
Despite the fact that residential property prices continue to rise, Fitch believes that the risks to financial stability associated with this development are mitigated by the generally comfortable financial position of households and the low cost of debt service. The Luxembourg banking system also remains well capitalised. The possible risks arising from changes in international taxation are surrounded by considerable uncertainty pending the precise modalities of the expected reforms.
Fitch finally underlines that Luxembourg has governance indicators and solid public and external balance sheets, as well as an exceptionally high income per capita. The comfortable fiscal situation released in the years preceding the crisis will have enabled the country to implement a robust economic response to the pandemic, while maintaining stable fundamentals.
Pierre Gramegna, Minister of Finance, commented “Fitch's rating underlines the importance of sound public finances for a small country like ours. It constitutes the necessary basis to meet the challenges of the years to come and enables us to fight against the economic and social consequences of the pandemic. Our debt ratio is among the lowest among AAA rated countries and I have no doubts that by pursuing a prudent and balanced fiscal approach, Luxembourg will be able to face the future with confidence."
