A Fitch IBCA statement released by the finance ministry said the agency upgraded South Korea's long-term foreign currency rating to BBB minus from BB plus and the short-term foreign currency rating to F3.

The finance ministry statement said the agency would upgrade the credit ratings of state-run Korea Development Bank. But it gave no further details.

Fitch said it was the first of the major credit agencies to restore the Republic of Korea's sovereign rating to investment grade.

Fitch and other international credit rating agencies cut their ratings on South Korea to junk bond status when the country plunged into a severe foreign currency crisis late in 1997.

The long-term local currency rating remains unchanged at A minus, reflecting sector restructuring, the Fitchstatement said.

Fitch IBCA said the prospect of South Korea's falling into another external liquidity crisis was remote.

It said South Korea's current account surplus was likely to be around $30 billion in 1999, accounting for 10 per cent of gross domestic product.

It said demands on international capital markets should be modest despite a heavy foreign debt repayment schedule.

"Given a further build-up in international reserves over the coming year... It is not beyond the realms of possibility that Korea could become a net external creditor by end-1999," it said.

Fitch said it was impressed by the economic stability and structural reform programme led by president Kim Dae-jung.

"Economic stabilisation is well advanced and the economy is beginning to recover, while Korean industry's ability to export world class products at attractive prices remains undimmed for the most part," it said.

But downside risks in the world economy could retard the recovery, it said. Persistent economic reform was animportant task for South Korea to rebuild investors' perceptions of Korea's external creditworthiness.

"A fundamental thrive without the all-pervasive help of a di rigiste state and banking can function in a commercially driven environment."

Fitch noted that "the enduring threat of North Korea" is a factor in the ratings.

"The sovereign rating of Korea must at least take account of the possibility of a change in the status quo on the Korean peninsula, if not the reality," it said.

Analysts said the upgrade was likely to lure back conservative foreign investors who fled local markets and ease terms for overseas borrowings by the government and companies.

"This is a significant change for South Korea," said Lee Hahn-koo, president of Daewoo Economic Research Institute.

"Foreign funds that have avoided South Korean markets because its ratings were below investment grade are expected to come in. Furthermore, risk premiums on overseas borrowings by the government, companies and banks would fall aswell," he said.

Tae Chung, head of research at SG Securities, said the upgrade indicated the South Korean government's efforts to tide over the country's financial crisis had begun to bear "real" fruit.

"Now that Fitch has gone official, S&P And Moody's are likely to follow suit," he said.