Public finance: Fitch affirmed its highest credit rating on Luxembourg’s debt and forecast the country’s economy will grow more than 2% this year and next.
One of the world’s largest credit ratings agencies has re-affirmed the Grand Duchy’s top notch score and forecast a public balance sheet and economic growth above the euro zone average.
In a periodic review, Luxembourg retained its “AAA” rating from Fitch on Friday.
The credit bureau said: “The economy has had a relatively robust recovery since the global financial crisis, with five-year average growth of 2.5%, compared with 0.6% for the euro area and 1.6% for ‘AAA’ peers. Real GDP growth is estimated to be 2.8% in 2014, and then forecast to slow slightly to 2.3% in 2015, before accelerating to 2.7% in 2016.”
Due to changes in EU rules that took effect on 1 January, Luxembourg is expected to lose VAT revenues worth 1.4% of GDP, Fitch estimated. However the agency expressed confidence in the ability of the Grand Duchy’s government to balance its books through tax rises and spending cuts.
“Public finances are a key rating strength, with general government debt estimated to be 24.2% of GDP, and a government surplus of 0.2% of GDP in 2014, outperforming the ‘AAA’ median,” Fitch analysts said.
At the same time, the agency warned that major problems in the financial services space--which represents nearly a quarter of the economy’s gross value added and one in nine jobs--would lead it to re-examine the Grand Duchy’s credit score: “A severe sudden contraction in financial sector activity could have adverse ramifications on the macro economy, resulting in deteriorating conditions for the labour market and public finances.”
Pension reform needed
The ratings firm additionally stressed the need for movement on the long-discussed revamp of state retirement funds: “Fitch assumes that new structural reforms to the pension system and other ageing-related policies will eventually be introduced to mitigate the increasingly pressing problem of ageing-related costs. Failure to do so could see Luxembourg’s rating gradually coming under pressure over the next decade.”
The only other euro area countries with AAA ratings from Fitch are Austria, Finland, Germany and the Netherlands. Elsewhere in Europe Denmark, Norway, Sweden and Switzerland also have Fitch’s top score.
In a statement made after the Fitch report was released on Friday, Pierre Gramegna, Luxembourg’s finance minister, said: “The AAA score is assurance of the stability of and the confidence in Luxembourg’s economy. It guarantees the attractiveness of the country to investors and the creation of new jobs.”