Fitch Ratings has upgraded the Republic of Lithuania's Foreign and Local Currency Issuer Default ratings ("IDRs") to 'A' from 'A-(A minus)' and 'A+' from 'A' respectively. The Outlook is Stable. The Country Ceiling has been upgraded to 'AA' from 'AA-(AA minus)' while the Short-term Foreign Currency rating is upgraded to 'F1' from 'F2'. Fitch is also assigning an 'A' rating to Lithuania's forthcoming EUR600 million 2012 Eurobond.

"Fitch's upgrade to Lithuania's sovereign ratings is driven by strong economic growth and real convergence with Western Europe, coupled with fiscal discipline and low government debt levels," says David Heslam, Associate Director in Fitch's Sovereigns group in London.

Lithuania's real GDP growth has averaged almost 8% in the past five years and per capita GDP has increased from 38% of the EU average in 2000 to 52% in 2005, higher than both Latvia and Poland. At less than 20% of GDP, low government debt levels compare favourably with the 'A' range median (32%) and are a rating strength for Lithuania. The government's track record of fiscal discipline is also notable: the budget deficit is expected to be just 1.3% of GDP this year and has been well below the 3% Maastricht reference rate since 2000.

Growth levels far above the EU average have partly been financed through running current account deficits and the steady build-up of external debt although crucially, this is largely as a result of private sector and not sovereign borrowing. The volume of loans from foreign parent banks to their Lithuanian subsidiaries has been growing rapidly since 2002. The risks inherent in this rapid accumulation of external debt are mitigated by the high level of foreign ownership in the banking system: with around 90% of system assets in foreign hands, the sector represents only a limited contingent liability to the sovereign.

Overall, Lithuania's external finances do not compare favourably to the 'A' range median, although they are stronger than those of its Baltic neighbours. In particular, official reserves are equivalent to 2.5 months of imports and the liquidity ratio is 73% compared to the 'A' range median of 3.9 months and 131% respectively.

Lithuania received a set back when its bid for EMU membership was rejected in mid-2006 on the basis that it had not fulfilled the Maastricht inflation criteria. Inflation has since trended up and Fitch recently revised its end-2006 and 2007 inflation forecasts upwards to 3.9% and 4.7% respectively. The latent inflationary pressures within the Lithuanian economy have forced the government to refrain from adopting a new concrete target for euro adoption, which is now expected to be "from 2010". Nevertheless, the upgrade is warranted by Lithuania's stand alone credit fundamentals.