RIYADH (AFP) – Rating agency Moody’s on Monday upgraded Saudi Arabia to its second-highest level as oil earnings and a recovering economy push the government’s budget back into the black this year.

Moody’s Investors Service hiked Saudi government foreign and local currency debt to Aa3 from the previous rating of A1 even as Riyadh powers ahead with its massive state spending programme on schools, infrastructure and the military.

“The upgrade was prompted by the continued strong state of government finances, which have largely withstood oil price volatility and the global economic crisis,” Moody’s said in a statement.

“A return in the budget to a moderate surplus — from an estimated small deficit in 2009 — will restore the kingdom’s debt trajectory back on its former improving trend, even with continued large-scale infrastructure spending.”

Moody’s cited a surge in foreign exchange reserves to 410 billion dollars at the end of 2009 after the recovery of oil prices from lows in the 30 dollar a barrel range last year to more than 70 dollars.

Saudi Arabia is the world’s second largest oil exporter after Russia, and OPEC’s leading member.

Moody’s senior vice president Tom Byrne said in a statement that for a further upgrade Moody’s would gauge “the continued strength in public sector finances and the success of the government’s infrastructure programme in improving the country’s long-term competitiveness and economic strength.”

The global rating agency said it considered “remote” the potentially negative scenarios of a sudden, sharp decline in oil prices and inefficient government spending.

“Moody’s also considers event risks stemming from geopolitical uncertainties to be moderate,… (but) more elevated than most rated countries,” it said.

Saudi Arabia is spending around 400 billion dollars over the 2008-2013 period to massively expand educational and health facilities, build new infrastructure like trains, and expand its oil and petrochemcial industry.

Additional heavy spending is also going into the military sector as the country shores up its defences.