Moody’s analyst Heiko Peters, seen speaking in Poland on 5 October 2017, was lead author of report, issued on Tuesday evening, that praised Luxembourg’s public balance sheet. Photo: @MoodysInvSvc
Luxembourg’s strong national balance sheet remains one of the country’s main strengths, a global credit ratings agency has said in a note to investors.
At the same time, the grand duchy’s heavy exposure to the financial industry and international pressure to change the corporate tax system are notable challenges, according to a Moody’s “Regular update” report issued the evening before the government’s budget announcement this week.
“Luxembourg’s credit profile is determined by four factors”, Moody’s explained in the report. They are “economic strength”, “institutional strength”, “fiscal strength” and “susceptibility to event risk”.
Sound scores from big credit agencies like Moody’s are important because, generally speaking, they lower the cost of government borrowing and attract a wider pool of investors.
For the economic strength category, Moody’s stated that the grand duchy’s score had improved slightly this year:
“We have adjusted Luxembourg’s economic strength upwards from an indicative score of ‘High’ to a final score of ‘Very High (-)’ to reflect Luxembourg's position as one of the wealthiest countries in the world.”
“High” is the 5th and “very high minus” is the 3rd highest of 15 marks in the category.
On the other hand:
“with the financial sector accounting for over a quarter of Luxembourg’s GDP and around 12% of total employment, Luxembourg’s economy is particularly dependent on developments in this industry. Due to a number of external factors, including the evolving regulatory and tax frameworks in the EU and the fragmentation of financial markets, we expect Luxembourg’s growth potential to be lower than in the pre-crisis period.”
“European Commission (EC) probes continue to challenge Luxembourg’s authority to provide potential selective tax advantages to large corporations. This was highlighted by a recent finding of the EC that Luxembourg gave illegal tax benefits to a large corporation. The country has reiterated its commitment to tax transparency and anti-tax avoidance measures in the context of strong external pressures put in recent years on the country given its very favorable corporate tax environment.”
Moody’s assessment of institutional strength praised increased hiring at the financial regulator, the CSSF, increased supervision by the Luxembourg Central Bank, and the “greater involvement” of both bodies in EU working groups.
Fiscal strength was judged to be “very high plus” (the top grade out of the 15 levels) based on low levels of public debt and initial reforms to the public pensions system (although further reform is needed).
Susceptibility to event risk was “low minus” (the 4th lowest score, still out of 15), reflecting the “large banking sector”. Luxembourg did not score lower because of the “soundness” and “relatively high degree of diversification” of the country’s financial sector, and the government’s track record in managing the economy.
The Moody’s paper was not a change in the country’s credit rating; it was an update to investors. The agency reiterated the grand duchy’s top-notch AAA score in March.