Rating agency Moody’s on Friday confirmed Luxembourg’s triple-A rating, crediting the strength of its institutions and the country’s resilience in a difficult EU economic context.

“Luxembourg’s credit profile will remain resilient to the economic growth challenges that many European countries are facing. Given the economy’s small size and high reliance on financial services, the strength of the government’s balance sheet is of particular importance to the sovereign credit profile,” the report published on Moody’s website said.

“In this context we expect the strength of Luxembourg’s institutions, in particular in terms of fiscal policy effectiveness and financial sector supervision, to ensure that risks to the public finances or financial stability will continue to be effectively managed,” it continued.

Luxembourg’s debt, estimated at 25.9% of GDP at the end of 2024, is one of the lowest among triple-A countries, and is expected to remain “broadly stable” this year and in 2026, the rating agency said.

The country’s debt affordability metrics are expected to “weaken somewhat” considering it will have to reimburse its maturing debt in a world where global interest rates have shifted sharply, but “it will remain significantly below the media of Aaa-rated peers,” Moody’s said.

The report also praised the Luxembourg authorities’ ability to counter shocks and respond to risks for the economy and public finances over the past years, and “the prudent supervision and rigorous control of credit institutions and other financial entities.”

Ageing population and pollution

However, the small state’s unique profile puts it at risk when it comes to environmental, social and governance (ESG) criteria: the country is at high risk of flooding – which requires a strong mitigation protocol – and its traffic of cross-border commuters has an impact on emissions.

“This may make large emissions reductions more challenging to achieve, even though the government has implemented measures such as free public transportation and an enhanced electrical vehicle charging network,” the report said, adding that “a high degree of urbanization, which is related to this issue, also increases pressures on biodiversity.”

These issues are “manageable”, the analysis concluded.

Lastly, like for many other countries, Luxembourg’s ageing population could be an issue, however, “these are mitigated by the sizable buffers in the social security funds, posing moderately negative risks.”

It is impossible for Luxembourg to improve its rating – as triple-A is the highest achievable one – but “a large, permanent increase in the government’s debt burden and associated significant deterioration in debt-affordability metrics” could risk downgrading it, as the country’s small size limits its ability to take on a much larger debt.

Rating agency S&P also gave Luxembourg a triple-A rating at the end of January of this year.