Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the cases of sovereigns, sub-sovereigns and supranational organisations that may act as a lender of last resort.

Scope performs monitoring reviews to determine whether material changes and/or changes in macro-economic or financial-market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit rating’s performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope announces the result of each monitoring review on its website and/or on its subscription platform ScopeOne.

Scope completed the monitoring review for the Grand Duchy of Luxembourg (long-term local- and foreign-currency issuer and senior unsecured debt ratings: AAA/Stable; short-term local- and foreign-currency issuer ratings: S-1+/Stable) on 8 October 2025.

This monitoring note does not constitute a credit-rating action, nor does it indicate the likelihood that Scope will conduct a credit-rating action in the short term. Information about the latest credit-rating action connected with this monitoring note along with the associated ratings history can be found on scoperatings.com.

Key rating factors

For the updated rating report accompanying this review, please see here.

Luxembourg’s AAA ratings reflect: i) a wealthy, competitive and high value-added economy; ii) strong public finances, characterised by very low debt, a good track record of fiscal prudence, and a resilient public debt structure; and iii) a strong external position reflecting its significant net external creditor position. These factors contribute to Luxembourg’s economic resilience and ability to withstand future shocks, as demonstrated during recent crises.

The ratings are constrained by: i) high exposure to adverse external developments as a small, open economy; ii) financial system vulnerabilities linked to elevated private debt levels and an outsized financial sector; and iii) long-term fiscal pressures linked to population ageing and a generous social welfare system.

The economic momentum is expected to remain modest in 2025, with real output expected to expand by just 0.8%, following slow growth of 0.4% in 2024. Private consumption remains subdued and persistent weakness in the construction sector weighs on investment. Scope expects growth to accelerate to 1.9% in 2026 and 2.4% in 2027. This rebound is expected to be driven by easing financial conditions, robust employment dynamics, and healthy growth in disposable incomes, supporting household consumption and residential investment. The medium-term outlook will furthermore benefit from sustained high levels of public investment, expected to remain around 4–5% of GDP annually. Medium-term macroeconomic prospects remain clouded by a degree of uncertainty, largely due to a volatile external environment. While the direct impact of the U.S. tariff shocks on Luxembourg’s economy is likely to be limited, indirect effects - particularly through its main euro area trading partners – may weigh on growth.

Following a 0.9% of GDP surplus in 2024, Scope expects Luxembourg’s fiscal balance to shift into a deficit of 0.6% of GDP in 2025. This forecast accounts for a normalisation in revenue growth, due to lower windfall revenue from corporate income taxation and the impact of recent tax adjustments, including the indexation of tax brackets and a reduction in the corporate income tax rate. The ramp-up in defense spending – to 2.0% of GNI this year and 5.0% by 2035, from 1.3% in 2024 – will weigh on the medium-term fiscal outlook, though Scope expects it will be partly offset by saving measures in other policy areas. Conversely, the upcoming implementation of a pension reform (including increases in contribution rates and an extension of the contribution period), expected for 2026, should help partly alleviate spending pressures stemming from population ageing. Scope expects the fiscal deficit to average about 1.0% of GDP over 2026-2030. The debt-to-GDP ratio is forecast to increase somewhat to 26.7% by the end of 2025, from 26.3% at end-2024, before remaining broadly stable in subsequent years. This debt trajectory is anchored by robust nominal growth prospects and strong debt affordability.

The Stable Outlook represents the opinion that risks for the ratings are balanced over the next 12 to 18 months.

Downside scenarios for the ratings and Outlooks are if (individually or collectively):

1. The medium-term economic growth outlook deteriorated significantly;
    
2. Financial stability risks increased materially, threatening macro-economic stability;
    
3. The fiscal outlook weakened, resulting in a significant increase in government debt.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 27 January 2025) is available on scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Brian Marly, Senior Analyst

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