MEXICO CITY Mixed signals from the U.S. economy are clouding the growth outlook for Mexico and it needs to be ready for the shocks that could accompany a possible withdrawal of U.S. monetary stimulus, Finance Minister Luis Videgaray said on Wednesday.
Mexico's government last week cut its growth outlook for 2013 to 3.1 percent from 3.5 percent after a soft first quarter, and Videgaray said Latin America's No. 2 economy has been hurt by weaker U.S. demand for its exports.
"Without a doubt the most important thing is the weakness in the growth of the United States ... which still shows mixed signals," Videgaray told the Reuters Latin America Investment Summit in Mexico City. "We have good data in the United States and the next day we have discouraging data."
Mexico sends nearly 80 percent of its exports to its northern neighbor and solid U.S. demand for Mexican goods has helped support its economy during sluggish global growth during the last two years.
"Clearly, we think that the U.S. economy has a good horizon out there, but we are still not there, and without a doubt this affects Mexican exports and aggregate Mexican demand," he said.
Videgaray said it was still unclear if Mexico's government, which has to balance its budget this year by law, would need to cut public spending.
"It is still too premature to establish if there will be a drop in income or not. Remember, other elements of public revenue are above what was established in the budget law, such as the price of oil," Videgaray said.
Mexico's 2013 budget estimated an average oil price of $86 per barrel, while the price of its export mix has averaged about $94 per barrel so far this year.
Videgaray managed President Enrique Pena Nieto's campaign last year and is seen as one of the architects of a pact with the two main opposition parties to pursue an ambitious reform agenda.
Mexico's divided Congress has approved major education and telecommunications bills since Pena Nieto took office in December, appearing to mark a break with about 15 years of legislative deadlock on tough issues.
However, divisions within the main conservative opposition party could undermine support for the pact ahead of talks on key energy and fiscal reforms planned for the second half of the year.
"The Pact for Mexico is being tested every day and the government is working every day to preserve this climate of cordiality that allows for these agreements," Videgaray said.
EYES ON FEDERAL RESERVE
He said Mexico is eyeing the possibility that the U.S. Federal Reserve will begin paring back its massive monetary stimulus, which has helped the U.S. economy and fed into global demand for riskier assets such as emerging market debt and currencies.
Policymakers in emerging markets around the world are concerned that their currencies are becoming too strong and that the huge capital inflows could quickly reverse if the Federal Reserve pulls back from the stimulus measures.
"This was one of the important themes discussed at the G20 meetings in Washington: what are the exit mechanisms when liquidity returns to normal levels. Without any doubt, Mexico is preparing for it and Mexico has to be prepared," he said.
"It is not something that we think will happen in the coming weeks, nor probably in the coming months, but eventually global monetary policy will return to normal," Videgaray said.
Foreign holdings of peso-denominated debt have risen more than six-fold since the start of 2009 to about 1.75 trillion Mexican pesos ($142 billion) this May. Mexico has nearly $170 billion in reserves plus a flexible credit line with the International Monetary Fund worth more than $70 billion.
Mexico's central bank cut its benchmark interest rate in March to a record low of 4.0 percent in what was seen as a bid to try to slow the tide of yield-hungry investors surging into Mexican markets. Analysts expect the central bank could cut interest rates again once a current spike in inflation subsides.
Yields on Mexican peso bonds have hit successive record lows, while Mexico's peso earlier this month hit its strongest level since August 2011.
Videgaray said there were no current plans to change the country's foreign exchange policy. Mexico has eschewed the types of direct intervention that other emerging market economies have used to try to tame unwanted currency gains.
(Editing by Dave Graham, Kieran Murray and Paul Simao)