Frankfurt am Main, August 30, 2019 -- Moody's Investors Service ("Moody's") has today affirmed the Aaa senior
unsecured and long-term issuer ratings of the Government of Luxembourg.
The outlook remains stable.
The key drivers for the affirmation of the Aaa rating are:
1) Luxembourg's robust growth performance and extraordinarily high
wealth levels, which support economic resilience;
2) The very strong institutional framework, reflected in very strong
governance indicators and effective financial services sector regulation
and supervision;
3) The very high fiscal strength, exemplified by general government
fiscal surpluses, low and declining government debt levels,
and sizable public sector assets.
The stable outlook reflects Moody's expectation that Luxembourg's credit
profile will remain resilient to risks associated with Brexit, ongoing
changes in global and EU-wide tax regulations and other challenges
in the future. Given the economy's small size and elevated reliance
on financial services, Moody's places particular emphasis
on the strength of Luxembourg's government balance sheet and predictability
and effectiveness of fiscal policy, as these provide a buffer against
potential economic or financial shocks.
Today's rating action also applies to Luxembourg Treasury Securities
SA, a special purpose vehicle (SPV) established by the Government
of Luxembourg, for which Moody's has affirmed the Aaa backed
senior unsecured rating and maintained the stable outlook. The
payment obligations associated with the certificates issued by the SPV
are direct obligations of the Government of Luxembourg, and as such
carry a rating in line with the sovereign.
Luxembourg's long-term country ceilings for local and foreign
currency bond and bank deposits remain unchanged at Aaa. Its short-term
country ceilings for foreign-currency bonds and bank deposits remain
unchanged at Prime-1 (P-1).
RATINGS RATIONALE
RATIONALE FOR THE AFFIRMATION OF THE Aaa RATING
FIRST DRIVER: ROBUST GROWTH PERFORMANCE AND VERY HIGH WEALTH SUPPORT
ECONOMIC RESILIENCE
A key factor informing the rating affirmation is Moody's very high
assessment of the country's economic strength, supported by
sustained and robust growth performance, and extraordinarily high
wealth levels.
Luxembourg has experienced particularly strong growth since the global
financial crisis, averaging 2.8% per year between
2010 and 2018, outpacing average annual growth of 1.7%
in the euro area during the same period. Growth has been broad-based
throughout the past five years, with both domestic and external
demand contributing positively to overall economic growth. Despite
less supportive external conditions, Moody's expects growth
rates to remain broadly in line with potential growth, averaging
2.5% between 2019 and 2023.
Strong growth over an extended period has allowed Luxembourg to build
up significant levels of wealth. GDP per capita (purchasing power
parity basis) was around $107,000 in 2018, much higher
than the median for all euro area countries (around $40,117)
and Aaa-rated peers (around $50,500), and the
fourth highest in Moody's universe of rated sovereigns.
Despite the economy's small size and strong reliance on the financial
services sector, Luxembourg provides a stable economic environment
with a volatility in real GDP growth of 2.7 standard deviations
over 2009-2018, which is close to the euro area average at
2.1 and below that of Aaa-rated peers like Sweden at 3 or
Singapore at 3.8. The financial services sector itself is
diversified and it features a very large international financial center,
catering to the needs of a diversified international client base instead
of being solely focused on providing financial services to the domestic
economy. Investment funds, banking services and insurance
activities all contribute significantly to the sector, while their
risk profiles differ. Furthermore, the authorities actively
support the development of high value-added activities outside
financial services for instance in information and communications technology,
health and environmental technologies, and logistics.
SECOND DRIVER: VERY STRONG INSTITUTIONAL FRAMEWORK
Luxembourg scores strongly in the Worldwide Governance Indicators,
which Moody's uses as starting point for assessing institutional
strength. Within the universe of sovereigns rated by Moody's,
Luxembourg ranks above the 90th percentile for government effectiveness,
control of corruption, and rule of law.
In light of the financial services sector's importance to Luxembourg's
economy, Moody's views the regulatory authorities' prudential
supervision and rigorous controls of credit institutions and other financial
entities and industry professionals as a key feature of its very high
assessment of the country's institutional strength. The rating
agency believes that this particular feature contributes to the efficient
and healthy functioning of the country's financial services industry,
ultimately, reducing the risk of domestic shocks originating from
that sector.
The authorities have undertaken significant reforms to respond to the
specificities of Luxembourg's financial sector and have taken a
proactive stance in respect of early and full implementation of multiple
European and international standards. The authorities have transposed
the 4th EU Anti-Money Laundering Directive into national law in
2018, and finalized the first national risk assessment report in
September 2018.
The Systemic Risk Committee -- made up of the Ministry of Finance,
Banque centrale du Luxembourg (BCL), the Commission de Surveillance
du Secteur Financier (CSSF) and insurance supervisor Commissariat aux
Assurances -- analyses the links between banks and investment funds
as part of its macroprudential supervision of the financial sector.
In order to counter potential risks arising from elevated household debt
and rising residential property prices, the authorities activated
the counter-cyclical capital buffer of 0.25% in January
2019, which will come into effect from January 2020. In addition,
a revised draft bill -- first introduced in December 2017 --
providing the legal basis for an implementation of borrower-based
measures will likely be passed before the end of this year.
Finally, Moody's assessment of very high institutional strength
for Luxembourg is supported by a robust fiscal and economic policy framework,
anchored within EU-wide rules. While the outcomes of historically
prudent fiscal policy are reflected in very high fiscal strength,
the transparency of government finances and the predictability of fiscal
policy-making is a key part of Moody's institutional strength
assessment. Rigorous reviews of the draft budget by both the public
court of audit and the BCL highlight the high degree of public finance
transparency, in turn ensuring healthy political debate on budget
orientation and maintaining the accountability of policymakers.
THIRD DRIVER: VERY HIGH FISCAL STRENGTH, MARKED BY CONTINUED
FISCAL SURPLUSES, DECLINING DEBT AND SIZABLE PUBLIC SECTOR ASSETS
The rating affirmation also reflects the country's very robust government
finances compared with most peers, underpinned by its strong economic
performance and prudent fiscal policies. Luxembourg's fiscal
metrics remain healthy and stable. The general government fiscal
balance has been in surplus since 2011, averaging 1.3%
of GDP between 2011 and 2018. The central government recorded a
fiscal surplus for the first time in 10 years in 2018 due to the significant
improvements in public finances since the global crisis through rigid
control of public spending, as well as government revenues boosted
by the strong economic situation. Together with sustained surpluses
for social security funds and local governments, the general government
surplus reached 2.4% of GDP in 2018, the highest since
2008.
The state budget for 2019 is using some of the fiscal space in order to
prepare for future challenges, and the government projects a general
government surplus of €632 million (1% of Moody's estimated
GDP) for 2019, down from a surplus of €1.4 billion (2.4%
of GDP) in 2018. Key measures in the budget include significant
investments in areas such as housing, education, research,
digitalization, transport infrastructure and sustainable energy.
From January 2019, the minimum social wage was increased by 100
euros net per month. The corporate income tax (CIT) rate was lowered
by one percentage point to 17%, and the income bracket to
which the reduced rate of 15% applies was widened to €25,000
from €175,000. Measures being implemented to promote
compliance with climate commitments include the increase in excise duties
on diesel and gasoline.
Moody's expects general government surpluses to average around 1.3%
of GDP over the coming years until 2023. This will support a continued
decline in the general government debt ratio, which Moody's
expects to fall below 20% of GDP by 2020, from 21.4%
at the end of 2018. The government's balance sheet is also
supported by large holdings of assets. Reserves in the Compensation
Fund to provide funding for future pension benefits amounted to 33%
of GDP at the end of 2018. The government also holds stakes in
several commercial and non-commercial companies, which it
values at approximately 10% of GDP. Even excluding these
presumably less liquid assets, the government's financial
assets exceed its gross debt levels.
That said, the most recent aging report by the European Commission
(EC) highlights significant long-term sustainability challenges
as demographic pressures rise. The EC projects that Luxembourg
will experience the largest increase and to have the highest level of
pension expenditures as a share of GDP in the EU by 2070, reaching
18% of GDP, almost double the current level.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's view that downside risks to the credit
profile, such as exposure to Brexit, ongoing changes in global
and EU-wide tax regulations, global trade tensions,
or high leverage of the private sector are mitigated by the very high
degree of economic resilience, significant fiscal space, the
sovereign's institutional capacity to manage shocks, and expected
further policy action to address long-term economic and fiscal
challenges stemming from demographic change.
In addition, exposure to event risks are low. Very small
financing needs and the sovereign's strong market access at very low cost
limits government liquidity risks, while the persistent current
account surplus of around 5% of GDP and strongly positive net international
investment positive of close to 45% of GDP support Moody's view
of very low external liquidity risks, despite the large volatility
observed in financial account flows. While private sector debt
is very high and the banking system very large, in its baseline
scenario Moody's does not see an elevated likelihood of additional contingent
liabilities from the banking system crystallizing on the government's
balance sheet.
WHAT COULD MOVE THE RATING DOWN
Downward pressure on Luxembourg's Aaa rating would arise if Moody's
were to observe a large increase in the government's debt burden and associated
significant deterioration in debt affordability metrics. Luxembourg's
debt level is low relative to peers, but the country's small size
somewhat limits its ability to take on significant quantities of additional
debt compared to larger and more diversified economies.
Additionally, downward pressure on the rating could emerge in the
unlikely scenario of political risks in the euro area fully materializing,
thus threatening the stability of the monetary union. In this case,
Moody's would expect an adverse impact on Luxembourg's growth outlook,
and therefore its economic strength, which in turn could weigh on
fiscal strength via reduced revenues. Similarly, any resulting
increase in global financial volatility could put pressure on the country's
cross-border financial sector, thereby increasing susceptibility
to event risk.
GDP per capita (PPP basis, US$): 106,705 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.6% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.9%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: 2.4%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 4.7% (2018 Actual) (also
known as External Balance)
External debt/GDP: [not available]
Level of economic development: Very High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 28 August 2019, a rating committee was called to discuss the
rating of the Luxembourg, Government of. The main points
raised during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's institutional strength/ framework, have not materially
changed. The issuer's fiscal or financial strength, including
its debt profile, has not materially changed. The issuer's
susceptibility to event risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Steffen Dyck
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
