Luxembourg Retains S&P’s AAA Rating Amid Modest Growth Outlook

Luxembourg has retained its prestigious ‘AAA/A-1+’ sovereign credit rating from S&P Global Ratings, with a stable outlook, underscoring the nation’s resilient fiscal position and policy flexibility. The rating agency emphasized Luxembourg’s ample fiscal space, which allows it to withstand global economic pressures without jeopardizing its strong net government asset position.

S&P noted that Luxembourg’s economy remains fragile after exiting a technical recession in 2023. The agency now forecasts real GDP growth of just 1% in 2025, down from its earlier 2.4% projection, citing weaker global trade, financial sector volatility, and geopolitical uncertainties. However, growth is expected to rebound, averaging 2.1% between 2026 and 2028, supported by easing monetary policy, eurozone recovery, and housing market stabilization.

The country’s fiscal performance remains robust, with a budget surplus of 1% of GDP in 2024, outperforming expectations. S&P projects a slight surplus of 0.2% in 2025 before shifting to an average deficit of 0.9% from 2026 to 2028, as revenue growth slows and expenditures rise. Key risks include volatile corporate tax revenues, pension sustainability, and rising defense commitments, with Luxembourg pledging to boost defense spending to 5% of gross national income by 2035 under NATO obligations.

Despite these challenges, Luxembourg’s net government asset position is forecast at 10% of GDP by 2025, gradually easing to 6% by 2028. Debt servicing costs remain minimal, with interest payments projected at under 1% of government revenue. As a leading financial hub, Luxembourg continues to reduce its external debt burden, which improved to 139% of current account receipts in 2024, down from 255% in 2019, reinforcing its financial stability.