| MEXICO CITY
MEXICO CITY Mexico's new government on Friday forecast a slight economic slowdown in 2013, flagging risks to growth stemming from Europe's debt crisis and the battle in the U.S. Congress to avoid the so-called fiscal cliff.
Presenting plans for a balanced budget for next year, Finance Minister Luis Videgaray said Latin America's second biggest economy would expand by about 3.5 percent next year after growth of almost 4 percent in 2012.
Videgaray said a slowdown in the United States, Mexico's main trading partner, would hold back the economy. Nearly 80 percent of Mexican exports go to the United States.
"It's a prudent estimate and also reflects the risks implied by the situation in Europe and of course the fiscal situation in the United States," Videgaray said.
Worries over the outlook have been fanned by the failure of U.S. political leaders to reach a deal yet to avoid the combination of tax hikes and federal spending cuts set to start taking effect in 2013.
Still, new President Enrique Pena Nieto is hoping to capitalize on a recent improvement in the Mexican economy, which has outperformed its regional peer Brazil for the past two years, helping to spur record amounts of investment in 2012.
Videgaray outlined forecasts for oil production and the price of crude very much in line with the previous budget.
Mexico sees the average cost for a barrel of crude at $84.90 and oil output at nearly 2.6 million barrels a day. U.S. crude was just below $86 a barrel on Friday. Oil revenues account for nearly a third of the federal budget. The peso exchange rate was seen at 12.90 per dollar.
U.S. demand for Mexican goods has helped shield the country from a wider global slowdown. But Pena Nieto's administration, has work to do if wants to realize its ambition of raising economic growth to about 6 percent a year.
Pena Nieto took office on Saturday, returning to power his centrist Institutional Revolutionary Party, or PRI, after 12 years in the opposition. Visiting dignitaries were hopeful the new government would unlock more of the economy's potential.
"I do sense considerable self-confidence in the country and a feeling that they are at a turning point," former British Finance Minister Norman Lamont told Reuters earlier this week after attending Pena Nieto's inauguration in Mexico City.
In his first speech as president, Pena Nieto pledged a balanced budget. That is required by law - excluding debt at state oil firm Pemex. Factoring in Pemex investment, a deficit of 2 percent of gross domestic product is forecast for 2013.
Pena Nieto has stressed the need for discipline in public spending, but also wants to raise infrastructure outlays and social security coverage, including pensions for the elderly.
To help pay for that, he wants to enact a fiscal reform to raise revenue and curb dependence on income from oil. He also plans to open up Pemex to more private investment.
Manlio Beltrones, the PRI's leader in the lower house of Congress, said on Friday the latest spending package was essentially a stop-gap budget due to time constraints.
The fiscal reform bill would be ready by July at the latest and would aim to raise Mexico's tax take by an amount equal to 2 to 3 percentage points of gross domestic product to help pay for Pena Nieto's social security plans, Beltrones said.
A trim public deficit and solid growth have helped attract record flows of foreign investment in Mexican stocks and bonds.
Investors have taken note of Pena Nieto's stated intention to shake up competition and liberalize the economy, a message that contrasted with recent "interventionist" signals coming out of Brazil, Lamont said.
"All those things are going to move attention more to Mexico. The impression I've had is that a lot of people believe there will be more opportunity for foreign investment both in the electricity sector and in the oil and gas sector," he said.
Mexico had run slight deficits in previous years, as it recovered from the 2008-09 recession. Lawmakers must approve the budget before the end of the year, but the lack of any new taxes bodes for a fairly smooth ride in Congress.
(Reporting by Mexico City Newsroom; Writing by Dave Graham; Editing by Simon Gardner and Peter Cooney)