CORRECTED-UPDATE 3-Mexico government defends 2021 budget, Moody's says it is not sustainable

(Removes reference to Mexico being one notch from losing investment grade rating)

MEXICO CITY, Sept 9 (Reuters) - Mexico’s finance minister on Wednesday defended his 2021 budget, calling next year’s growth estimate responsible, as ratings agency Moody’s warned the government’s austere approach to public finance “was not sustainable.”

The finance ministry on Tuesday delivered a budget proposal that would keep a lid on spending and forecasts only partial recovery for an economy hammered by the COVID-19 pandemic.

“It’s a responsible estimate,” Finance Minister Arturo Herrera said at the president’s daily news conference.

However, Ariane Ortiz-Bollin, sovereign analyst for Mexico, said the lean budget meant the ratings agency was now more worried about Mexico’s economic growth than debt.

“It is not sustainable,” Ortiz-Bollin said. “It can’t be repeated every year.”

The budget forecast Mexico’s economy, Latin America’s second-largest, would contract 8% this year, a somewhat rosier view than the central bank’s worst-case scenario of a 13% slump.

President Andres Manuel Lopez Obrador and Herrera have said Mexico’s economy is not in a position to go on a spending spree and offer the kind of bailouts seen in some European nations or the United States. They have also refused to take on new debt in order to defend public finances.

But businesses big and small argue they have been left out in the cold as Mexico faces its steepest economic recession since the Great Depression of the 1930s.

Ortiz-Bollin said Mexico’s sovereign rating is not expected to go to “junk” over the next 12 months despite a negative outlook.

Herrera said that while the growth forecast in the budget was not based on the development of a vaccine, the economy would continue to be impacted by the coronavirus crisis.

“While there’s no vaccine, the economy is going to keep operating in unusual circumstances,” he said.

Reporting by Abraham Gonzalez in Mexico City Additional reporting by Stefanie Eschenbacher, Daina Beth Solomon and Raul Cortes in Mexico City Writing by Anthony Esposito Editing by Frank Jack Daniel and Matthew Lewis