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MEXICO CITY, Nov 17 (Reuters) - The International Monetary Fund on Tuesday trimmed its economic growth forecasts for Mexico citing a decline in oil production, which funds nearly a third of the country's budget.
In its yearly analysis of Latin America's second-largest economy, the IMF also urged the central bank to taper foreign exchange intervention aimed at stemming the peso's deep slide, arguing it would sap reserves over time.
The IMF lowered estimates for Mexico's economic expansion to 2.5 percent for next year from 2.8 percent predicted in October, citing expected cuts in production at state-owned oil giant Pemex. It also lowered this year's forecast to 2.25 percent, from 2.3 percent previously.
The Fund said growth could be even lower if capital flow volatility spikes, domestic oil production shrinks further, or the economy of the United States, Mexico's chief export market, expands more slowly than expected.
The Fund praised the Bank of Mexico for keeping rates at a record low as growth has wobbled and inflation remains tame. But it recommended an end to daily dollar auctions to support the peso, which in the past year has slumped 30 percent against the dollar.
The central bank's interventions have shrunk reserves to $182 billion as of September from $195.7 billion at the end of 2014, the IMF said.
"The current pace of intervention is not sustainable over the medium-term," IMF staff wrote in the report.
The IMF also touted progress on Mexico's landmark economic reforms, approved in 2013, including a package to boost competition in the telecommunications sector that has cut electricity prices and helped nudge inflation to a series of record lows.
But the Fund decreased projections for how much the deep-seated reforms would boost growth in the future, after it lowered estimates for both oil production and global oil prices, which should limit investment in Mexico's petroleum sector.
The Fund now expects the reforms to raise growth to 3 to 3.5 percent in the medium term, below government estimates of a 4 to 5 percent expansion by 2020.
The IMF also urged Mexico to strengthen an initiative to improve fiscal discipline and set explicit targets for the deficit as a share of GDP. The government pledged to shrink its budget gap each year, but allowed itself exceptions.
"The use of the exceptional circumstances clause should be explicitly limited to cases of large output or oil price shocks to help constrain discretion," the Fund said. (Reporting by Alexandra Alper and Anna Yukhananov; Editing by Chizu Nomiyama)