The downgrade of two notches came just days after Standard & Poor's downgraded the island's debt by one notch, prompting the local government to file new legislation aimed at shoring up the economy as it prepares to re-enter the bond market this month.
Moody's said Puerto Rico's government took strong and aggressive actions to control spending and reduce debt issuance, among other things, but that it remained concerned about its liquidity and ability to access the market.
"While some economic indicators point to a preliminary stabilization, we do not see evidence of economic growth sufficient to reverse the commonwealth's negative financial trends," the agency said. "Without an economic revival, the commonwealth will face difficult decisions in coming years, as its debt and pension costs rise."
A spokeswoman for Gov. Alejandro Garcia Padilla said he would soon release a statement regarding the downgrade.
Garcia and other top officials have pledged that they would continue to reduce the debt and present a deficit-free budget next fiscal year. Garcia also has said he will strengthen the liquidity of Puerto Rico's Government Development Bank, which decreased sales of new bonds late last year because of high interest rates.
Puerto Rico's bonds are popular with U.S. investors because they are exempt from federal, state and local taxes, and investors have become increasingly concerned about its ability to repay its debt. Puerto Rican debt is held by roughly 70% of U.S. municipal mutual funds, according to Morningstar.
Alan Schankel, managing director of Janney Capital Markets in Philadelphia, said Moody's announcement does not change the market dynamic in a significant way because many expected it.
"It doesn't close the door, but it probably makes a new issuance ma! rginally more challenging," he said.
Puerto Rico is struggling with $70 billion in public debt accumulated over several decades. The island of 3.67 million people also has entered its eighth year in recession and faces a 15.4 percent unemployment rate, higher than any U.S. state.