Luxembourg has for a number of years been part of the exclusive group of countries whose economies are top rated by all major credit rating agencies. This trend continues with the recent confirmation of its AAA rating by DBRS Morningstar.
AAA rating for solid public finances
Budgetary leeway, low public debt
Despite the shock caused by the war in Ukraine, the rating agency believes that Luxembourg’s growth and public finances remain solid. It notes that the country has the necessary budgetary leeway for handling the current situation, although it points out that support measures for households and businesses will impact public finances in 2022 and 2023. DBRS Morningstar also notes that the low level of Luxembourg’s public debt is a key element of its credit rating assessment. Even if it were to increase slightly in 2022 and 2023, the country’s debt ratio remains among the lowest in Europe. However, the agency stresses that the government continues to commit to keeping public debt below 30% of GDP.
Mitigating the impact of inflation
While real GDP grew further in the 1st quarter of the year, a contraction of 0.5% was seen in the second quarter and the whole year should see some slowdown in growth given the pressure exerted by the high energy prices. Faced with an inflation rate of 8.8% in October 2022 (according to the European price index), DBRS Morningstar expects the negative impact of inflation on consumer and business sentiment to be mitigated from 2023 thanks to the implementation of the support measures decided in cooperation between the government, the employers’ associations and the trade unions.
Attractive financial centre, political stability
Finally, DBRS Morningstar believes that the overall situation of the banking sector remains solid and that a credit rating downgrade is unlikely, provided that the attractiveness of the financial centre is preserved and as long as the volatility of the financial markets does not cause major shock. According to the agency, Luxembourg’s credit rating is also supported by the high quality of public institutions and the country’s political stability.
“I am particularly delighted with this confirmation of the AAA rating, because it is the first that comes after the agreement between the government, employers and trade unions of last September and the presentation of the draft budget for 2023,” comments Minister of Finance Yuriko Backes. “This decision testifies to the merits of the successive packages of measures in favour of households and businesses and it reminds us at the same time that a responsible and far-sighted policy continues to be required in order to preserve favourable prospects for the future.”
Photo credit: Tristan Schmurr