In an opinion published on 30 August (login required), the credit rating agency said that Luxembourg's credit profile is driven by “robust growth performance,” a “very strong institutional framework” and “very high fiscal strength”.
It cites Luxembourg’s strong recovery since the economic crisis, averaging 2.8% per year from 2010 to 2018, compared to 1.7% in the euro area. Looking ahead, Moody’s estimates a growth rate of 2.5% for 2019 to 2023.
Luxembourg GDP per capita was based around $107,000 in 2018, according to Moody’s it was “much higher than the median for all euro area countries (around $40,117) and Aaa-rated peers (around $50,500), and the fourth highest in Moody's universe of rated sovereigns.”
Sectoral and geographical diversification of the financial services sector, and promotion of value added activities like ICT, information, technology and logistics were cited as positive factors which balance out the economy’s dependence on the financial sector.
A second driver of the high assessment of the country’s strength, the ratings agency wrote, is the country’s institutional strength. Among all the countries Moody’s rates, Luxembourg ranks above the ninetieth percentile for government effectiveness, control of corruption and rule of law. Prudential supervision and rigorous controls of credit institutions and other financial entities and industry professionals was also praised for reducing the risk of domestic shocks from the financial services industry.
The very high fiscal strength marked by continued fiscal surpluses, declining public debt and sizeable public sector assets was listed as the third driver for the high rating.
It expected government surpluses to be around 1.3% of GDP by 2023. And it added the fact that the central government recorded a fiscal surplus for the first time in 10 years in 2018 due to the significant improvements in public finances since the global crisis through rigid control of public spending, as well as government revenues boosted by the strong economic situation.
“Together with sustained surpluses for social security funds and local governments, the general government surplus reached 2.4% of GDP in 2018, the highest since 2008,” it wrote.
Decline in public debt ratio
Reducing surpluses should result in a steady decline in the public debt ratio, from 21.4% at the end of 2018 to less than 20% of GDP in 2020, Moody’s forecast.
Meanwhile, risks from Brexit exposure and ongoing changes in European and global tax regulations remained low if authorities address emerging issues.
Finance minister Pierre Gramegna (DP) in an uncertain international context, the continuation of the AAA is an important sign, reflecting the financial and economic stability of our country. Above all, I am delighted to see that the policies pursued in recent years have been confirmed, and that for Moody's the country's economy is well positioned to face Brexit and the challenges ahead."
Moody’s wrote that the government's balance sheet is also supported by large holdings of assets, among them reserves in the Compensation Fund to provide funding for future pension benefits amounted to 33% of GDP at the end of 2018, and stakes in several commercial and non-commercial companies, valued at approximately 10% of GDP.
On a more sceptical note, Moody’s cited the most recent ageing report by the European Commission, forecasting long-term sustainability challenges as demographic pressures rise. It wrote: “The EC projects that Luxembourg will experience the largest increase and to have the highest level of pension expenditures as a share of GDP in the EU by 2070, reaching 18% of GDP, almost double the current level.”