Finance minister Yuriko Backes (DP) has welcomed the confirmation of Luxembourg’s AAA credit rating from Fitch. “This best possible rating is a guarantee of confidence and stability, and it is an illustration of the resilience and performance of our economy, even in times of crisis,” Backes said in a statement on Saturday.
Fitch said that Luxembourg’s ratings “reflect its exceptionally high income per capita, as well as its strong governance indicators and public and external balance sheets” which outweigh the economy’s small size and “inherent macroeconomic volatility”. The ratings agency reported that the grand duchy’s fiscal buffers allow for room to respond to economic shocks.
Noting that Luxembourg was one of only two EU countries to achieve a budget surplus at the general government level in 2021, Fitch says that although it expects the measures being implanted to counter inflation will lead to a widening of the deficit again this year to 0.5% of GDP, it expects that Luxembourg will return to a balanced fiscal stance by 2024. “Driven by an improvement in the central government balance as economic growth accelerates and temporary measures are phased out.”
Luxembourg also continues to report the lowest general government debt ratio among AAA sovereigns, Fitch states. Public debt fell to 24.4% of GDP at the end of 2021 and although it is expected to hit 24.6% of GDP by the end of 2022, it will likely “stabilise at 25% in 2023-2024 before resuming a gradual downward path.”
Fitch expects economic growth to slow this year, following a very strong rebound of 6.9% in 2021. The agency has revised its 2022 real GDP growth forecast to 2.3%, from 3.5% at the February review, and to 2.2% from 2.6% for 2023.
A prudent and forward-looking fiscal policy remains the best way forward
But it says that Luxembourg’s limited direct trade and financial links to Russia and Ukraine has helped, even though indirect effects from the war in Ukraine are negatively affecting business and consumer confidence. But the grand duchy’s economic output is “less affected by the spike in energy prices due to the small size of Luxembourg's manufacturing sector…and a less energy-intensive service sector.”
As for inflation, Fitch estimates that annual inflation will average 8.3% in 2022 before falling to 2.9% in 2023. The agency welcomed the tripartite agreement reached on 31 March between the government, employers and two trade unions to delay the automatic wage increase triggered by indexation, which it says will help “prevent the emergence of a wage-price spiral”.
Backes said that in the face of the challenges Luxembourg is currently facing, “a prudent and forward-looking fiscal policy remains the best way forward and will be a key factor in maintaining our country’s medium- and long-term prosperity.”
The agency’s report also highlighted the grand duchy’s strong performance in terms of ESG, as well as the independence of its institutions from the government. It cited transparency, a record of stable and peaceful political transitions, well-established rights of participation in the political process, strong institutional capacity, effective rule of law and low levels of corruption as positives.
Luxembourg has long retained its top rating, with Fitch last status in February 2022.