Fitch renews Luxembourg’s “AAA”
The international rating agency Fitch has just confirmed this Friday, after the closing of the markets, the AAA credit rating of the Grand Duchy of Luxembourg with a stable outlook. According to Fitch, this better rating reflects a high per capita income, good governance indicators and solid public finances despite the difficult context.
In its report, the agency highlights the good performance of public finances in the context of the pandemic. For the year 2022, Fitch estimates that the “Energiedesch” and “Solidaritéitspak” packages of measures, amounting to 1.1% of GDP, aimed at reducing the impact of high inflation, will lead to a widening of the deficit to the level general government by 0.5% of GDP. The agency remains confident that the country will be able to gradually return to a balanced situation in the medium term, by implementing a prudent budgetary policy.
After the very strong rebound in growth in 2021, Fitch expects economic growth to slow down for 2022. Thus, the agency has revised down its real GDP growth forecast for 2022 to 2.3%, against another 3.5% in February. Fitch also notes that Luxembourg continues to display the lowest public debt ratio among AAA-rated countries. The debt fell to 24.4% of GDP at the end of 2021. Although it may increase further this year to reach 24.6% of GDP, it will stabilize at 25% in 2024 before resuming a trajectory gradual downward.
The agency notes that Luxembourg’s direct commercial and financial links with Russia and Ukraine are very limited. The indirect effects of the war in Ukraine certainly have a negative impact on business and consumer confidence, and the rise in international energy and food prices is having a moderating effect on domestic consumption. Economic activity is, however, relatively less affected by soaring energy prices, due to the small size of Luxembourg’s manufacturing sector and a less energy-intensive services sector.
As for annual inflation, Fitch estimates that it will average 8.3% in 2022 before falling to 2.9% in 2023. The agency particularly welcomes the tripartite agreement reached on March 31 between the Government, employers and two trade unions, on the shift of the index tranche from mid-2022 and the principle of a single index tranche per 12 months.
The analysis particularly highlights the Grand Duchy’s very good performance in terms of Environmental, Social and Governance (ESG) criteria in international comparison. The agency notes that in terms of governance, the country stands out for the independence of its institutions and its transparency, a track record of stable and peaceful political transitions, well-established rights to participate in the political process, solid institutional capacities, an effective rule of law and a low level of corruption.
Finance Minister Yuriko Backes comments: “In the current uncertain context, the renewal of our AAA is excellent news, which I was delighted with. This best possible rating is a guarantee of confidence and stability, and it is an illustration the resilience and performance of our economy, even in times of crisis. Faced with the multiple challenges we currently face, a prudent and far-sighted fiscal policy remains the best way forward and will be a determining factor in maintaining the prosperity of our country in the medium and long term.”
Communicated by the Ministry of Finance