Sovereign debt: Despite “LuxLeaks” and rising costs, Standard & Poor’s has confirmed the Grand Duchy’s top notch credit score.
One of the main global credit ratings agencies has affirmed the Grand Duchy’s top notch “AAA” score, but warned that labour and housing costs remain high and that the pension system needs further reform.
The country’s financial services sector will remain the strong point of the economy and contribute a large portion of economic growth through 2018, despite increased European regulations, Standard & Poor’s said in its annual ratings review, issued Friday.
S&P downplayed post-LuxLeakspressure on the Grand Duchy’s multinational corporate taxation regime. “Although this could squeeze government revenues, we nevertheless expect that the government will be able to continue to consolidate its fiscal position because we think it will adjust tax rates as necessary,” it wrote.
Labour, housing costs
However, the ratings agency warned that the “cost-competitiveness of Luxembourg’s nonfinancial services sector will continue to decline” as labour costs are rising faster than the country’s main trading partners.
In addition, S&P hinted at a real estate bubble, saying that: “we expect the housing market will continue to show signs of stretched valuations, representing a risk to Luxembourg’s domestic economic performance.” A large number of new building permits being issued or rising interest rates would deflate prices, although: “We assume that any house price correction would be gradual and not fundamentally jeopardize financial stability.”
Government balance sheets
The central government’s budget should return to surplus this year and local councils and the social security funds remain in the black, the credit bureau noted.
At the same time, S&P echoed a report issued the same day by the rich world think tank OECD by calling for a revamp of the retirement system. “Over the long run, under the current pension framework, we think Luxembourg will face significant hurdles in containing budgetary pressure from its aging population. We believe the 2013 pension reform is a step in the right direction, but it is not enough to ease the long-term pressure”.
The only other euro area country with S&P’s AAA rating is Germany. Other European countries with the top score include Denmark, Norway, Sweden, Switzerland and the UK.
The Grand Duchy also holds AAA ratings from the other two big global review agencies, Fitch and Moody’s.
Generally speaking, higher credit scores lead to lower borrowing costs when a country issues bonds.