"The upgrade reflects Latvia's progress in achieving solid and broad-based economic growth, further cutting its budget deficit, improving its terms of market access and reducing its net external debt ratios," said Fitch in a statement.

Fitch's move follows that of rival Standard & Poor's, which raised its rating for the Baltic state last week by one notch to BBB.

Fitch said that Latvia's economy is "showing impressive resilience to the recession in the eurozone" and forecasts Latvian GDP growth at 5.0 percent in 2012.

It said the growth has been driven by high investment growth through the strong absorption of EU funds and a rebound in private consumption, with net exports also less of a drag on growth.

Fitch said it expects Latvia's GDP growth to ease to 3.0 percent in 2013, though to remain well above the EU average.

The ratings agency was also optimistic about Latvia's efforts to qualify for adopting the euro in 2014.

"Fitch expects Latvia to meet the Maastricht criteria in spring 2013, and to be invited to join the euro in January 2014," it said.

"However, there is a risk that Latvia could miss the inflation criterion or its adoption could otherwise be delayed," it added.

Fitch said Latvia's government was on track to squeeze the 2012 budget deficit to 1.9 percent of GDP, below the target of 2.5 percent due to increasing tax revenue and lower government expenditure.

It added that it believes the government's targets to reduce the budget deficits to 1.4 percent in 2013 and 0.8 percent in 2014 are realistic.