By Sarah Marsh and Marc Frank
HAVANA (Reuters) - Cuba's economy shrank 0.9 percent this year in tandem with the crisis in key trading partner Venezuela, President Raul Castro told the National Assembly on Tuesday in a closed-door speech, predicting a slightly brighter outlook for 2017.
The figure suggests sharp economic contraction in the second half after the cash-strapped government slashed imports, investment and fuel in response to lower exports and a drop in cheap oil deliveries from Venezuela. It had reported 1 percent growth for the first half.
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"Restrictions in cash and in the provision of fuel worsened in the second half," Castro said, according to excerpts published by official media outlet Cubadebate.
"Financial tensions and challenges that might intensify again in certain circumstances will persist, but we hope that gross domestic product (GDP) will grow moderately, by around 2 percent (in 2017)."
Cuba's centrally planned economy has struggled for decades with the U.S. economic embargo and mismanagement at home.
Market-style reforms and, more recently, a detente with the United States that has boosted remittances and the tourism sector, helped the economy grow on average at close to 3 percent each year between 2011 and 2015.
Still, the long slump in global fuel prices is hurting many of Cuba's top trading partners such as Angola, Venezuela and Brazil, and revenue from the sale of professional services to those countries has dropped.
Key ally Venezuela has slashed its provision of cheap oil and the drop in global commodities prices is punishing Cuban exports of nickel, refined oil products and sugar.
Some experts fear that future growth from thawing relations with the United States may also be at risk since Republican Donald Trump's victory in the U.S. presidential election.
Trump, who takes office Jan. 20, has vowed to "terminate" President Barack Obama's engagement with Cuba unless Havana gives the United States what he calls a "better deal."
According to published excerpts of his speech, Castro did not comment on the future of Cuban-U.S. relations, except to recall the negative impact of the embargo.
The president, who has promised economic reforms, did say foreign investment is one area that could improve.
Since approving a law to bolster foreign investment more than two years ago, Cuba has approved just $1.3 billion worth of projects. It aims to take in $2 billion annually, making investment an important growth driver.
Castro said it was necessary to "overcome the obsolete mentality, full of prejudices toward foreign investment."
"We are not going toward capitalism, but we cannot be afraid of, or put obstacles in the way of, that which we can do within our laws," he said, adding that investment in the energy sector was key.
A fiscal boost to production and investment should help fuel growth next year, according to the assembly's Economic Commission. The fiscal deficit will rise to 12 percent of GDP.
"If the expansive fiscal policy is well deployed, it could help manage the crisis," said ex-Cuban central bank official Pavel Vidal, now a professor at Universidad Javeriana Cali in Colombia.
"Otherwise it could have disastrous consequences for the country's monetary and financial stability," he said.
(Reporting by Sarah Marsh and Marc Frank; Editing by David Gregorio and Alan Crosby)