“Luxembourg’s ratings reflect its exceptionally high income per capita, strong governance indicators and public and external balance sheets, which outweigh the economy’s small size and inherent macroeconomic volatility,” the agency said in a statement.
Luxembourg raised €5bn on capital markets to help fund the pandemic recovery and public debt should peak at just over 28% in the coming years. This is well below a median of 44% of GDP among triple A-rated countries, Fitch said.
“Luxembourg’s economy has proved resilient to the shock from the Covid-19 pandemic,” the ratings agency said.
The grand duchy’s economy contracted by around 1.3% last year, initial estimates show, well below a euro-area drop of 6.5%.
In its summer economic forecast, the European Commission expected Luxembourg’s economy to rebound by 4.8% this year, followed by more modest growth of 3.3% in 2022.
“A risk to Luxembourg’s public finances comes from the impact of potential changes in international taxation,” said Fitch, unlike DBRS Morningstar, which estimated that changes to the global corporate tax landscape would not weaken the grand duchy’s economic model.
Luxembourg’s finance minister Pierre Gramegna (DP) had previously welcomed the reform effort to levy a 15% minimum corporate income tax globally.
Like DBRS Morningstar, however, Fitch warned that a severe financial or macroeconomic shock could jeopardise Luxembourg’s top rating.
“Fitch’s rating underlines the importance of sound public finances for a small country like ours,” Gramegna said in a statement. “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.”