The agency said Luxembourg had shown “ample capacity to confront the shock brought on by the coronavirus pandemic and to support the economic recovery without significant weakening of its public finances.”
Luxembourg on capital markets to help fund the pandemic recovery, pushing public debt up to €18.5bn, or around 28% of GDP. This is higher than during the aftermath of the 2008 financial crisis, when debt peaked around 23%.
“Luxembourg entered the crisis with a strong fiscal position and the government debt ratio is set to remain modest and below the country’s own debt ceiling of 30% of GDP,” DBRS Morningstar said in a .
The ratings agency said Luxembourg’s “solid institutions and stable political environment, its advanced and wealthy economy, and its strong external position” contributed to the country keeping its AAA rating.
The grand duchy’s economy contracted by around 1.3% last year, initial estimates show, well below a euro-area drop of 6.5%. “Teleworking has helped cushion the shock on the labour market and support incomes,” DBRS Morningstar said.
In its summer , the European Commission expected Luxembourg’s economy to rebound by 4.8% this year, followed by more modest growth of 3.3% in 2022.
However, DBRS Morningstar also warned that a “severe shock” to the country’s financial centre could result in a downgrade. “A downgrade could also come from material damage to Luxembourg’s attractiveness for investment,” the agency said.
An international drive to introduce a global minimum corporate income tax--pushed by the US and G20 countries--should not have a negative impact on Luxembourg, however. “DBRS Morningstar does not expect potential changes to the global corporate tax landscape to weaken Luxembourg’s competitive economic model,” the group said.
Luxembourg’s finance minister Pierre Gramegna (DP) had previously effort to levy a 15% minimum tax, saying in an that “taxation will play less of a role in the future in attracting companies if we have a common framework,” and citing Luxembourg’s AAA status as a draw.
“This new confirmation of the ‘AAA’--with stable trend--attests the validity of the government’s prudent fiscal policy as well as the effectiveness of the measures taken during the crisis,” Gramegna said in a statement published on Sunday.
“Despite the major impact of covid-19 on public finances, Luxembourg’s debt ratio remains one of the lowest in Europe and I am delighted that the country’s economy continues to be attractive, both for investors and for employees,” he said.
The country’s labour market in 2020, data by national statistics office Statec showed last week.