Pierre Gramegna, Luxembourg’s finance minister (left), speaks with a journalist outside a European Council meeting in Bratislava on 10 September 2016. Photo: European Council
One of the world’s three major credit rating agencies has reiterated the Grand Duchy’s top notch score.
In its annual review, Standard & Poor’s affirmed its highest “AAA” rating for the country’s sovereign debt.
Generally speaking, a higher credit rating means the country’s treasury has to pay lower interest rates on its sovereign debt, and its bonds are more attractive to conservative institutional investors like pension funds and endowments.
“We expect Luxembourg’s general government budget to be broadly in balance from 2017, contrary to the previous record of mild surpluses,” Standard & Poor’s stated on Saturday morning. The social security system is broadly stable, although further pension reform--to push up the average retirement age--is still needed.
The Grand Duchy’s banks are in good shape and are unlikely to need a state bailout, in the firm’s view.
“Luxembourg has shown strong GDP growth over the past three years, thanks to strong service export growth and immigration inflows,” the agency said. “We expect real GDP growth to average 3.1%” between 2016 and 2019.
Looking ahead, “changes in international regulation of corporate taxes… are likely to be gradual, and we expect that the government will respond to them proactively”.
More serious threats might possibly come from the European Commission’s recent state aid rulings, which “could create significant uncertainty in the tax environment in the EU”, S&P said.
The economy continues to be dominated by the financial sector; the “cost-competitiveness of Luxembourg’s nonfinancial services remains a challenge to economic diversification. In part, the financial sector drives up wages in other sectors, making them less competitive.”
In addition, housing prices “will likely continue to show signs of stretched valuations, representing a risk to Luxembourg's domestic economic performance”.
Luxembourg has also received AAA ratings from the other two major credit agencies, Fitch and Moody’s. The Grand Duchy, Denmark, Germany, Netherlands, Norway, Sweden and Switzerland are the only European countries to hold that trifecta.