Wed Mar 4, 2015 5:31am EST
(Adds background, more quotes)
By Chris Vellacott and Sujata Rao
LONDON, March 4 (Reuters) - Falling oil production remains the most important risk to Mexico's economy this year and may force the government to tighten spending further into 2016, Mexican Finance Minister Luis Videgaray said on Tuesday.
Speaking to reporters at the London Stock Exchange, Videgaray said the risk was that oil production could fall further, following January's output decline which sent production to the lowest since mid-1990s.
"Certainly oil production remains the most important risk to (gross domestic product) output this year," Videgaray said.
Oil accounts for 13 percent of Mexico's exports and a third of budget revenues.
"We need to prepare for a scenario where the price of oil remains low and output of crude may not be as high as it was forecast... We need to prepare public finances to face such risks and that's a key reason why in January we did budget cuts," he said.
The government was braced for a situation "where (oil) production stays where it is and may even go lower", he added.
Videgaray said of the 2016 budget: "We aim to spend less and spend better."
A steep drop in oil prices, which has weighed on the peso since late last year, is forcing the government to cut spending and has curbed expectations Mexico will soon see a tide of investment to revive flagging crude production.
The minister said there was no change to the government's growth forecast of between 3.2 percent and 4.2 percent, though guidance will be reviewed in May. Some economists say the forecasts are too optimistic.
Mexico has offered several oil exploration and production contracts as part of a reform package that broke a decades-old monopoly held by state oil firm Pemex. However, the oil price fall and the contract terms have raised doubts about its success.
Videgaray said Mexico was reviewing the contract terms after criticism from oil companies and would release updated fiscal terms in Friday.
"We are listening to the market and making sure the Mexican contracts are flexible and competitive and as simple as possible," Videgaray said. "We are introducing more flexibility (to the fiscal side of contracts) to allow for higher rate of return."
Videgaray acknowledged that higher U.S. interest rates later this year could fuel greater financial market volatility. They may also lead to domestic interest rate rises.
Mexico had prepared for this by building reserves and fiscal discipline, Videgaray said, adding there would be no need to raise taxes or increase public debt.
Mexico has completed 85 percent of its funding for the year and expects to complete the rest soon, with plans for a yen bond in the first half, he said. (Reporting by Sujata Rao and Chris Vellacott)
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