Dagong Maintains the Sovereign Credit Ratings of Luxembourg at AAA with a Stable Outlook
Dagong Global Credit Rating Co., Ltd.
June 6, 2018
Dagong Global Credit Rating Co., Ltd. (hereafter referred to as “Dagong”) has decided today to maintain the local and foreign currency sovereign credit ratings of the Grand Duchy of Luxembourg (hereafter referred to as “Luxembourg”) at AAA, each with a stable outlook. Luxembourg’s repayment environment is stable, and although the country’s economic growth has slowed down, its continuing fiscal surplus, sufficient net financial assets, and extremely low debt loads all guarantee extremely strong government solvency.
The key reasons for maintaining the sovereign credit ratings of Luxembourg are below:
First, Luxembourg’s repayment environment is stable. The centripetal competition amongst political parties and the country’s coordination and cooperation mechanisms assure the stability of its political ecology. Luxembourg’s development strategies and policies are highly stable and consistent. The government has been improving the tax environment to respond with increasingly stringent tax transparency and a financial regulatory environment while pursuing tax reduction policies across the board to stimulate economic growth, alongside ongoing fiscal consolidation yielding results. In terms of credit environment, the credit policy has been loose and the banking system is sound. However, the country’s inflated investment funds incur underlying risks. Given the continuing low-rate environment, among other factors, in 2017, the net value of Luxembourg’s investment funds grew by 17% year on year. Moreover, there exists a stronger interconnectedness between investment funds and the businesses of banks and credit institutions. Hence, external shocks might pose a threat to the soundness of Luxembourg’s financial system.
Second, domestic and foreign demand altogether allow for economic pickup in the near term. In 2017, sluggish investment and declines in net exports caused Luxembourg’s economic growth to drop by 0.8 percentage point year on year to 2.3%. In the short term, tax reduction policies and relatively low credit costs will bolster private investment, while the government increasing infrastructure investment will boost financial investment as a whole, and overall recovery in the euro zone will drive up the exportation of offshore finances and investment funds, among other financial services. It is expected that in 2018 and 2019, Luxembourg’s growth will rebound to 3.0% and 2.9%. In the medium and long term, sufficient finances and national wealth accumulation can provide ample space and support for structural reform. However, a single economic structure and significant skill mismatch undermine the growth potential, thus Luxembourg’s growth will maintain around 3.0% over this period.
Third, a consistently deepening tax reform causes the fiscal surplus to slightly narrow down in the near term. Nonetheless, enormous net financial assets on behalf of the government guarantee the stability of repayment sources. In the short term, the full implementation of tax reform will lead both income and corporate tax revenues to fall, while the European Union’s new regulations result in the constant decrease of value-added tax revenues from e-commerce. It is projected that both in 2018 and 2019, the Luxembourg general government’s primary fiscal surplus will decline to 1.6%. The government has sufficient financial assets, seeing how as of the third quarter of 2017, the government’s net financial assets stood at 52.0% of GDP. These assets, coupled with extremely low financing needs and financing costs, render government repayment sources stable.
Fourth, Luxembourg’s sound fiscal surplus and very low debt loads assure immensely strong government solvency. In the short term, the government’s financing needs will fall drastically because of reductions in principal and interest repayments. It is projected that in 2018 and 2019, the Luxembourg general government’s debt burden will drop to 22.8% and 21.9%, while maintaining around 21.6% in the medium term. The country’s stern fiscal surplus causes the ratio of government debt to fiscal revenues over the same period to drop to 53.1% and 50.8%. Government debt has a reasonable maturity structure and the share of short-term debt has declined below 6% of the total debt. That, combined with the continuing currency account surplus and a stable position of net creditor, leads to very strong government solvency in local and foreign currency.
In the short term, Luxembourg’s repayment environment is stable. Although fiscal surplus will slightly narrow down on the account of tax reform, yet several factors, including relatively low government debt loads, continuing current account surplus, and the position of net creditor, all serve to guarantee that government solvency stabilizes at a high level. Therefore, Dagong assigns a stable local and foreign currency sovereign credit rating outlook for Luxembourg for the next one to two years.