But the ratings agency expressed concern at the slow pace of structural reforms, particularly in the banking system.
S&P raised its long-term foreign currency sovereign credit rating to "BBB+" from "BBB", with a stable outlook - putting Thailand on par with China, but behind Malaysia and South Korea.
"The upgrade reflects Thailand's strong external liquidity and public sector net external creditor standing," S&P said in a statement.
The news lifted the benchmark Stock Exchange of Thailand by 1.2 percent to 616.7 points by 0828 GMT. Yields on government bonds fell across the curve, with long-term debt down by 8 to 10 basis points.
But the S&P announcement, which came when the baht was already rising from one-year lows, had little impact on the currency.
"The upgrade is good for us, showing clearly that our economy is improving," Prime Minister Thaksin Shinawatra told reporters.
Finance Minister Somkid Jatusripitak speculated that it would be a good time for Thailand to issue bonds in foreign markets.
"The upgrade gives us a better outlook and will make foreign investors very confident in Thailand," he said.
Despite higher imports, S&P said Thailand's foreign exchange reserves were still projected at $42 billion -equivalent to 410 percent of short-term external debt - at the end of 2004.
Thaksin's government had made further progress in consolidating its budgetary position, which helped underpin the improvement on the external front, the agency said.
It expected the government to show a small surplus in the fiscal year ending September 2004, for the second straight year.
But Thailand's domestic currency credit standing was constrained by the slow pace of structural reforms, particularly in the banking system, it said.
S&P affirmed its short-term foreign currency rating of "A-2" and long- and short-term domestic currency ratings of "A/A-1". But it revised the domestic currency outlook to stable from positive.
"The Thaksin administration, despite its strong majority in parliament, has had limited success in forcefully pushing structural reforms," the S&P statement said.
It pointed to the banking system, where S&P estimated system-wide non-performing assets (NPAs) at a still significant 24 percent of loans at the end of 2003.
"At the same time, the government's penchant for using government-owned banks to implement off-budget measures in boosting economic growth could eventually affect its budgetary position, as a slowdown in the economy could turn some of these loans delinquent," the agency said.
Thaksin's party, expected to win a general election due early next year, would improve the country's growth prospects and credit standing if it pressed ahead with reforms.