The short-term foreign currency rating has been upgraded to F3 from B, while the long-term local currency rating remains unchanged at BBB+.
Fitch upgraded Lithuania's credit ratings for the first time in four years. The rating agency's representatives visited Lithuania in February.
Other international rating agencies have left the ratings they assigned to Lithuania before 1997 unchanged thus far. Upgraded ratings could help Lithuania secure loans at lower interest rates, cut spending and attract more investments.
"This is a result of the government's ongoing economic policies and tight fiscal discipline, and active work aimed at closer cooperation with international credit rating agencies," said Lithuanian Deputy Finance Minister Mindaugas Jonikas.
"The improved ratings will have an impact not only on the Lithuanian state, but also on private business - they will be able to borrow cheaper as well. The negotiations with the European Union are proceeding successfully, and the process of shifting the litas' peg from the U.S. dollar to the euro is expected to be smooth. Therefore, Lithuania's ratings are likely to improve further in the near future," Jonikas said.
Fitch upgraded Lithuania's rating in view of the country's progress in implementing structural reforms, reducing the fiscal deficit and stabilizing the financial system.
"Indeed, the budget deficit was cut from 7.8 percent of GDP in 1999 to 2.8 percent in 2000, allowing the general government debt to stabilize at 23 percent of GDP or 28 percent including government guarantees. Moreover, supported by this fiscal adjustment and by on-going industrial restructuring, the current account deficit fell from more than 11 percent of GDP to 6 percent," the agency said in a report.
"Against this background, economic prospects appear fairly good despite the global slowdown now underway. In addition, the more favorable policy environment, combined with a marked recovery of export growth, bodes well for a smooth repegging of the litas in early 2002."
Fitch said credit prospects are supported by the fact that the government is aiming at a balanced budget by 2003.
"The long-term goal of reducing the overall tax burden, combined with the costs of preparing for EU and NATO membership, pension reform and the closure of the Ignalina nuclear power station, makes this an ambitious target," it said. "However, the government has already started to take steps to address future spending pressures and, since the general government debt is fairly low, there is some flexibility on the fiscal side."
Fitch noted, however, that some weaknesses remain.
"The current account deficit is still fairly large and as a small, open economy, Lithuania is vulnerable to external shocks. Given the importance of refined oil exports, the failure to secure long-term crude oil contracts with LUKoil is therefore a concern. In addition, greenfield investment has been modest to date suggesting that the recent improvement in the financing mix could be threatened once the privatization process ends," Fitch said.
Since the long- and short-term foreign currency ratings for Vilniaus Bankas, Lithuania's largest commercial bank, were constrained by the sovereign rating, they have also been upgraded to BBB- and F3 from BB+ and B. The long-term local currency rating remains unchanged at BBB+.
This week a Lithuanian delegation, headed by Deputy Finance Minister Jonikas, will present the country's progress to the rating agency Moody's, which is also expected to review Lithuania's ratings in the near future.
Moody's has assigned a Ba1 foreign currency rating and a Baa1 domestic currency rating to Lithuania. The respective ratings by Standard & Poor's are BBB- and BBB+.