“Recent royal decrees will increase spending, but this will not endanger Saudi Arabia’s strong fiscal position and balance sheet, which underpin the ratings,” says Charles Seville, Director in Fitch’s sovereign team.

Seville also highlighted the government’s ability to alleviate socio-economic problems from increasing oil revenues.”

The total value of commitments under the two separate packages of decrees was up to SR450 billion (25 percent of 2011 forecast GDP), but most of the spending will be spread over several years. Spending could rise by 30 percent in 2011, driven in part by one-off items, but the government would still run a surplus of seven percent of GDP.

Saudi Aramco has raised oil production by 10 percent since January to make up for the halting of Libyan exports, while Fitch assumes Brent will average $100 per barrel in 2011, following the steep recent rise in prices.

By comparison, the fiscal breakeven oil price climbs to around $80 per barrel at present production levels, higher than in the recent past, but still comfortable.

Saudi Arabia has one of the strongest balance sheets among Fitch-rated sovereigns, mitigating vulnerability to an oil price correction.

Sovereign net foreign assets were $539 billion (124 percent of GDP) as of December 2010, allowing the government to easily finance unforeseen deficits from deposits.

Moreover, the sovereign has even greater financing flexibility, with a developed domestic capital market and consolidated debt below four percent of GDP.

Nevertheless, the spending increase has eroded the value of government assets in terms of years of prospective government spending, a measure of fiscal resilience, to below its 2009 peak.

Real GDP growth recovered to 3.8 percent in 2010 and will be around six percent in 2011, driven by an increase in oil production and the impact of the government spending boost.

Inflation has been on a downward trend but will likely rise, averaging over five percent in 2011, driven by commodity prices and housing costs, Fitch says.

Fitch notes that increasing the public sector minimum wage, introducing unemployment benefit and increasing salaries in the public sector may detract from efforts to spur Saudi nationals into taking jobs in the private sector. With unemployment at 10 percent — much higher among women and young people — creating jobs remains one of the most important priorities.

Political risk is a significant constraint on the rating at current levels.

Fitch does not expect serious unrest in the kingdom, but will monitor the situation closely. Structural factors such as those captured in the World Bank’s governance indicators remain weak compared with the ‘AA’ category median, Fitch said.