San Juan, Dec 14 (IANS/EFE): Ratings agency Moody's Investors Service Thursday slashed Puerto Rico's credit rating two notches to Baa3, or one level above speculative grade.

Moody's, which maintained a negative outlook for Puerto Rico's debt, said advances have been made in recent years on the economic and fiscal fronts but that they were not enough to impede the two-notch downgrade from Baa1.

The ratings agency expressed particular concern over the ability of the island's government to control public spending and lack of progress on pension reform.

"Economic growth prospects remain weak after six years of recession and could be further dampened by the commonwealth's efforts to control spending and reform its retirement system, both of which are needed to stabilize the commonwealth's financial results," Moody's said in its report.

"The lack of significant economic growth drivers and the commonwealth's declining population have also reduced prospects for a strong economic recovery," the agency said.

Looking back at the island's recent economic history, Moody's noted that in 2006 "Puerto Rico entered recession when the rest of the (United States) was still in full expansion mode".

Although pointing to encouraging sales in the retail, automotive and cement sectors, it said those economic indicators "are improving off a very low base, and reflect what is still essentially a weak economy that is not likely to be able to absorb much additional stress".

The agency said the "pension systems' combined unfunded liability of $33 billion is almost four times the annual budget of $9 billion", adding that it remains unclear how the incoming administration of Gov. Alejandro Garcia Padilla will resolve that problem and warning that lack of action could trigger another debt downgrade.

Moody's said that other factors that influenced its decision were high and rising debt levels, continued wide budget gaps, reliance on debt restructuring and deficit financing.