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Research Update: Luxembourg 'AAA/A-1+' Ratings Affirmed; Outlook Stable


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Research Update: Luxembourg 'AAA/A-1+' Ratings Affirmed; Outlook Stable


  • Luxembourg's prosperous economy is backed by an effective institutional framework, robust economic growth, and a large net asset position.
  • Net services exports' contribution drives current account surpluses, in turn supporting the large net asset position, while low government debt levels reflect persistent fiscal surpluses.
  • We expect pressure from changing international tax regulation will be effectively managed.
  • We are therefore affirming our 'AAA/A-1+' ratings on Luxembourg, and keeping the outlook stable.

Rating Action

On Sept. 14, 2018, S&P Global Ratings affirmed its 'AAA' long-term and 'A-1+' 
short-term foreign and local currency sovereign credit ratings on Luxembourg. 
The outlook is stable. 


The stable outlook reflects our expectation that, over the next two years, 
Luxembourg will maintain strong credit metrics while effectively managing 
changing international fiscal regulation.

We could consider a negative rating action if the economic and financial 
effects of tighter regulation of Luxembourg's financial services sector or 
corporate taxation framework were more pronounced than we expected. This would 
likely weaken the country's economic growth prospects and fiscal performance, 
and could weigh on sovereign creditworthiness. The ratings could also come 
under pressure if credit growth accelerated to levels that would risk 
undermining Luxembourg's economic and financial stability by, for example, 
encouraging unsustainable acceleration in asset valuations.


Our ratings on Luxembourg reflect its prosperous economy, transparent and 
effective institutional framework, prudent budgetary policies, and recurrent 
external surpluses. The financial and business services sectors are 
Luxembourg's key industries, supporting its role as a financial hub and 
contributing to its prosperity. At the same time, however, they expose 
Luxembourg to changing international financial regulations and potential 
external shocks. Those potential shocks are somewhat mitigated by the 
diversity of activities within the financial sector and by the government's 
efficient policy responses, which are consistent with a 'AAA' rating.

Institutional and Economic Profile: Strong institutions underpin effective policy-making and robust economic growth
  • Luxembourg is adapting to changes in the international tax environment.
  • Financial sector exports and increasingly, domestic demand, drive robust economic growth.
  • The main risks to growth are a hard landing in housing prices and reduced attractiveness to foreign companies in a context of stricter international tax regulation.
The ratings on Luxembourg benefit from the institutional framework, which, in 
our view, supports economic policies oriented toward sustainable economic 
growth. The state has promoted growth of the financial sector (27% of GDP in 
2016) and continues to identify areas for its expansion, while at the same 
time aiming to diversify the economy into nonfinancial sectors. Luxembourg's 
GDP per capita--estimated at $116,000 in 2018--is one of the highest among the 
sovereigns we rate. Its economy has enjoyed strong growth compared with other 
developed economies. We expect real GDP growth to average 3.3% per year in 
2018-2021, against 3.5% in 2013-2017. This favorable growth outlook is 
supported by the recent expansionary tax reform and the automatic wage 
indexations triggered in 2017 and 2018, which should continue boosting 
consumption. In addition, growth in financial services exports (63% of 
commercial services exports in 2017) should stay vigorous throughout the 
period, in part because some financial institutions are relocating European 
headquarters to Luxembourg from London following Brexit, as well as continued 
expansion of the eurozone. 

Employment growth, favorable financial conditions, and the expanding 
population have pushed up house prices. A limited supply in the rental market, 
and tax incentives for house purchases have also contributed to price 
increases. Although we expect population growth to continue, the rate of 
increase could somewhat diminish as lending conditions become more restrictive 
and as the government continues to take measures in order to increase the 
supply of affordable housing. Nevertheless, if the affordability of housing 
deteriorates, it could undermine consumption growth and reduce Luxembourg's 
attractiveness for foreign labor, while overvaluation could create risks of 
financial instability. 

Risks to growth are related to the external environment. Were Brexit to have a 
significant negative impact on the eurozone economy as a whole, Luxembourg's 
economy could also slow. Nonetheless, in the short term, Brexit also 
represents an upside risk in view of financial institutions' decisions to move 
their operations totally or partially from the U.K. to Luxembourg. 
International and European anti-tax avoidance initiatives, as well as the 
recent U.S. corporate tax reform, which incentivizes U.S. companies to 
repatriate their offshore profits, could also represent a downside risk, but 
the impact is not likely to be felt in the near term.

Flexibility and Performance Profile: Low debt and a large net asset position
  • Luxembourg has a history of budget surpluses, which supports its low level of debt.
  • Changes in the international tax environment are a challenge to Luxembourg's budgetary position, but large general government assets and low debt represent a significant buffer if risks materialize.
  • Large current account surpluses support the country's large external net asset position.
Luxembourg has mostly posted general government surpluses since 1995, in part 
owing to surpluses in the social security system. More recently, Luxembourg's 
e-commerce revenues from value-added tax (VAT) gradually eroded in the wake of 
the EU's measures to reduce VAT competition in the EU, which reduced the 
incentive for e-commerce companies to locate themselves in member states with 
low rates of VAT. However, Luxembourg's budgetary measures, including the 2% 
VAT rate increase and the spending containment plan, helped absorb this shock 
and limit the impact on the central government balance. We expect the general 
government balance will remain in mild surplus over our forecast horizon 
through 2021, at 1.1% of GDP in 2018 and averaging 0.7% over 2019-2021. Social 
security surpluses will keep offsetting gradually increasing deficits at the 
central government level, as the government pursues the expansionary tax 
reform--with the headline corporate income tax rate being lowered further to 
18% in 2018, from 19% in 2017. 

Luxembourg raises about 18% of tax revenues from the financial services 
industry, in particular from banks, holding companies, and investment funds, 
in part thanks to a competitive tax environment. As in other EU countries, the 
tax regime is subject to change as a result of various international 
initiatives, such as the recently adopted EU-wide Anti-Tax Avoidance 
Directive, which will be incorporated into Luxembourg law by the end of the 
year. Moreover, several of Luxembourg's tax rulings have been or are currently 
under investigation by the European Commission (EC) under EU State Aid rules. 
In this context, changes to the headline corporate tax rate is part of the 
government's changing approach to international tax competition, with a 
greater focus on headline tax rates than on tax exemptions. Luxembourg is thus 
adjusting to the changes in the international tax environment. This does not 
insulate the country from further risks stemming from international 
regulations, but such changes are likely to be gradual, and we expect the 
government to respond to them proactively to maintain a sound budgetary 
position over the medium term. The recent changes to the U.S. tax system could 
also represent a downside risk to tax receipts, but we do not expect any 
near-term impact.

We regard Luxembourg's 2013 pension reform as an important step toward 
increasing the long-term sustainability of the system. However, we find that 
the current framework is not sufficient to contain the long-term budgetary 
pressure. Early retirement schemes are still widespread and the retirement age 
is below the EU average.

Under our 2018-2021 forecasts, we expect that gross general government debt as 
a percentage of GDP will average 21% of GDP, excluding guarantees related to 
the European Financial Stability Facility (see "S&P Clarifies Its Approach To 
Accounting For EFSF Liabilities When Rating The Sovereign Guarantors," 
published Nov. 2, 2011). We expect the cost of debt to remain low, at around 
0.8% of revenues. We also forecast that general government assets will remain 
relatively high, ensuring an overall net asset position for the government. 
This represents a significant buffer in light of the challenges highlighted 

We expect Luxembourg to continue posting large current account surpluses in 
2018-2021, supported by strong service surpluses and offset by negative net 
income. Luxembourg's financial account flows reflect its role as a financial 
hub. These flows amount to significant gross assets and liabilities on the 
international investment position. These could represent an economic risk, 
rather than a balance-of-payments risk. For example, a reduction of inflows 
into special-purpose vehicles or funds would be matched by a reduction of 
corresponding outflows, but the service exports associated with these 
activities would also decline, undermining growth and current account 

As a member of the eurozone, Luxembourg's monetary policy is managed by the 
European Central Bank (ECB). We view the ECB's policy-setting as broadly 
appropriate for Luxembourg, in synchronization with its policies and those of 
major members of the area, such as neighboring France and Germany. That said, 
given relatively high growth in Luxembourg, as well as the ongoing rise in 
house prices, the ECB continuing its loose monetary policy may become less 
appropriate for Luxembourg in the medium term.

Key Statistics

Table 1

Luxembourg Selected Indicators
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
(Mil. €)
Nominal GDP (bil. LC) 44 46 50 52 53 55 58 62 65 68
Nominal GDP (bil. $) 57 62 66 58 59 63 70 77 81 85
GDP per capita (000s $) 108.0 115.0 120.8 102.7 101.8 105.9 115.9 124.5 127.4 130.5
Real GDP growth (0.4) 3.7 5.8 2.9 3.1 2.3 3.7 3.4 3.3 3.0
Real GDP per capita growth (2.8) 1.3 3.3 0.4 0.7 (0.2) 1.2 0.9 0.8 0.5
Real investment growth 6.1 1.2 4.3 (8.0) 0.5 1.9 1.7 1.9 2.0 2.0
Investment/GDP 19.4 19.0 18.8 18.1 17.9 17.3 17.0 16.7 16.6 16.6
Savings/GDP 25.0 24.5 24.0 23.2 23.0 22.3 22.2 22.0 22.0 21.9
Exports/GDP 186.4 190.6 208.2 222.7 221.3 230.0 231.3 232.1 233.0 234.1
Real exports growth 2.8 5.3 14.0 6.9 2.7 3.9 4.4 4.0 3.7 3.5
Unemployment rate 5.1 5.9 6.0 6.5 6.3 5.6 5.4 5.3 5.3 5.2
Current account balance/GDP 5.6 5.5 5.2 5.1 5.1 5.0 5.2 5.3 5.3 5.3
Current account balance/CARs 0.9 0.8 0.9 0.8 1.0 1.0 1.1 1.2 1.2 1.2
CARs/GDP 624.6 666.2 576.0 598.8 516.8 487.5 464.3 448.9 434.8 431.5
Trade balance/GDP (3.5) (2.0) (0.8) (5.7) (7.4) (7.5) (7.5) (7.4) (7.3) (7.4)
Net FDI/GDP 165.1 242.7 (63.2) (331.1) 6.2 (3.6) (8.0) (15.0) (20.0) (20.0)
Net portfolio equity inflow/GDP 305.4 242.6 387.1 352.6 218.4 444.3 303.0 295.0 300.0 300.0
Gross external financing needs/CARs plus usable reserves 410.3 408.9 454.3 535.6 574.6 574.4 562.6 545.0 544.8 529.5
Narrow net external debt/CARs 191.1 199.5 294.3 325.8 373.8 405.6 387.5 368.4 367.1 357.0
Narrow net external debt/CAPs 192.9 201.2 296.9 328.5 377.5 409.8 391.9 372.8 371.6 361.4
Net external liabilities/CARs (6.5) (8.1) (3.6) (1.6) (8.1) (7.4) (8.0) (8.6) (9.6) (10.3)
Net external liabilities/CAPs (6.5) (8.1) (3.6) (1.6) (8.2) (7.5) (8.1) (8.7) (9.7) (10.4)
Short-term external debt by remaining maturity/CARs 312.4 310.7 356.3 437.8 477.1 477.3 465.2 447.6 447.4 432.0
Usable reserves/CAPs (months) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Usable reserves (mil. $) 991 963 863 771 973 879 879 879 879 879
FISCAL INDICATORS (%, General government)
Balance/GDP 0.3 1.0 1.3 1.4 1.6 1.5 1.1 0.9 0.7 0.5
Change in net debt/GDP (0.7) 0.3 (2.7) (1.7) (3.8) 1.5 (1.4) 0.5 (0.8) (0.5)
Primary balance/GDP 0.9 1.5 1.8 1.7 1.9 1.9 1.4 1.2 1.0 0.8
Revenue/GDP 44.4 44.3 43.1 42.9 43.7 44.4 45.0 44.0 44.0 44.0
Expenditures/GDP 44.1 43.3 41.8 41.5 42.1 42.9 43.9 43.1 43.3 43.5
Interest /revenues 1.2 1.2 1.0 0.8 0.8 0.8 0.8 0.7 0.7 0.7
Debt/GDP 21.0 22.5 21.6 21.0 19.9 23.8 21.5 21.7 20.6 19.9
Debt/revenue 47.4 50.8 50.1 49.0 45.4 53.6 47.9 49.4 46.7 45.1
Net debt/GDP (11.6) (10.8) (12.7) (13.9) (17.4) (15.2) (15.8) (14.5) (14.7) (14.4)
Liquid assets/GDP 32.7 33.3 34.3 34.9 37.3 39.0 37.4 36.3 35.2 34.3
CPI growth 2.9 1.7 0.7 0.1 0.0 2.1 1.7 1.8 1.9 2.0
GDP deflator growth 2.6 1.7 1.6 1.3 (1.3) 2.1 1.7 1.9 1.9 2.0
Exchange rate, year-end (LC/$) 0.76 0.73 0.82 0.92 0.95 0.83 0.82 0.79 0.80 0.80
Banks' claims on resident non-gov't sector growth 3.1 6.4 4.9 15.7 8.7 9.5 6.0 6.0 5.0 5.0
Banks' claims on resident non-gov't sector/GDP 83.9 84.7 82.6 91.7 98.0 102.7 103.2 103.8 103.6 103.5
Foreign currency share of claims by banks on residents 8.8 8.5 9.7 9.3 8.9 7.9 8.0 8.0 8.0 8.0
Foreign currency share of residents' bank deposits N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Real effective exchange rate growth (1.9) 1.6 2.6 (1.9) 2.3 2.4 N/A N/A N/A N/A
Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2

Luxembourg Ratings Score Snapshot
Key rating factors
Institutional assessment 2
Economic assessment 1
External assessment 3
Fiscal assessment: flexibility and performance 1
Fiscal assessment: debt burden 2
Monetary assessment 2
S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings' "Sovereign Rating Methodology," published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.

Related Criteria

  • Criteria - Governments - Sovereigns: Sovereign Rating Methodology, Dec. 18, 2017
  • General Criteria: Methodology For Linking Long-Term And Short-Term Ratings , April 7, 2017
  • General Criteria: Methodology For Rating Sukuk, Jan. 19, 2015
  • General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
  • General Criteria: Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

Related Research

  • Sovereign Ratings List, Sept. 5, 2018
  • Sovereign Ratings History, Sept. 5, 2018
  • Sovereign Ratings Score Snapshot, Sept. 4, 2018
  • Global Sovereign Rating Trends Midyear 2018, July 16, 2018
  • Sovereign Risk Indicators, July 5, 2018. A free interactive version is available at
  • Default, Transition, and Recovery: 2017 Annual Sovereign Default Study And Rating Transitions, May 8, 2018
  • Sovereign Debt 2018: Global Borrowing To Remain Steady At US$7.4 Trillion, Feb. 22, 2018
  • Why Are Sovereign Foreign And Local Currency Ratings Converging? Jan. 10, 2018

In accordance with our relevant policies and procedures, the Rating Committee 
was composed of analysts that are qualified to vote in the committee, with 
sufficient experience to convey the appropriate level of knowledge and 
understanding of the methodology applicable (see 'Related Criteria And 
Research'). At the onset of the committee, the chair confirmed that the 
information provided to the Rating Committee by the primary analyst had been 
distributed in a timely manner and was sufficient for Committee members to 
make an informed decision. After the primary analyst gave opening remarks and 
explained the recommendation, the Committee discussed key rating factors and 
critical issues in accordance with the relevant criteria. Qualitative and 
quantitative risk factors were considered and discussed, looking at 
track-record and forecasts. 

The committee's assessment of the key rating factors is reflected in the 
Ratings Score Snapshot above.

The chair ensured every voting member was given the opportunity to articulate 
his/her opinion. The chair or designee reviewed the draft report to ensure 
consistency with the Committee decision. The views and the decision of the 
rating committee are summarized in the above rationale and outlook. The 
weighting of all rating factors is described in the methodology used in this 
rating action (see 'Related Criteria And Research'). 

Ratings List

Ratings Affirmed

 Sovereign Credit Rating                AAA/Stable/A-1+    
 Transfer & Convertibility Assessment   AAA                
 Senior Unsecured                       AAA                

Luxembourg Treasury Securities SA
 Senior Unsecured                       AAA                

Certain terms used in this report, particularly certain adjectives used to 
express our view on rating relevant factors, have specific meanings ascribed 
to them in our criteria, and should therefore be read in conjunction with such 
criteria. Please see Ratings Criteria at for further 
information. Complete ratings information is available to subscribers of 
RatingsDirect at All ratings affected by this rating action 
can be found on S&P Global Ratings' public website at Use the Ratings search box located in the left 
column.  Alternatively, call one of the following S&P Global Ratings numbers: 
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(46) 8-440-5914; or Moscow 7 (495) 783-4009.
Primary Credit Analyst:Ghita Lamriki, Paris (33) 1-4420-6709;
Secondary Contact:Marko Mrsnik, Madrid (34) 91-389-6953;
Additional Contact:EMEA Sovereign and IPF;

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