Luxembourg retains AAA credit rating despite fiscal pressures

Scope Ratings reaffirmed Luxembourg’s AAA credit rating with a stable outlook on Friday, highlighting the country’s resilient economy, strong public finances and solid external position.

The Grand Duchy continues to demonstrate “prudence and stability” despite rising fiscal pressures and exposure to global uncertainties, the agency said.

Still, its report flagged several risks, including global shocks, geopolitical tensions and changes to international tax rules, explaining that the financial and construction sectors continue to face headwinds from higher interest rates and falling asset values.

Despite these risks, Luxembourg remains one of the wealthiest countries in the world, with GDP per capita above €123,000 in 2023. While the economy contracted by 1.1% last year, Scope expects growth to rebound to 1.4% in 2024 and 2.7% in 2025, supported by household spending, wage growth and a recovery in investment.

The country’s fiscal deficit widened to 1.3% of GDP in 2023 due to energy subsidies and public wage increases. Scope forecast a further rise to 1.6% in 2024 and 1.9% this year, as spending on housing, social support and defence remains high.

Despite the looser fiscal stance, Luxembourg’s debt remains low by EU standards. “Public debt stood at 25.7% of GDP at the end of 2023 and is expected to reach 32% by 2029,” reads the report. Scope also acknowledged the government’s decision to scrap its self-imposed 30% debt ceiling, while maintaining its commitment to fiscal responsibility.

However, long-term challenges persist. In its rating, Scope warned of rising age-related costs, with Luxembourg set to face one of the EU’s steepest increases in pension and healthcare spending by 2050. The country’s pension fund remains well-capitalised for now, with reserves covering more than four years of payouts, the agency said however.