By Michael Connor
March 13 (Reuters) - Standard & Poor's Ratings Services cut its general obligation credit rating for Puerto Rico on Wednesday to BBB minus, just one step from junk status, saying it was worried the Caribbean island's government budget gaps would prove hard to close.
"The outlook is negative," the Wall Street credit-ratings group said in a news release.
"We base the downgrade on the result of an estimated fiscal 2013 budget gap, which we view as significantly larger than originally budgeted, absent corrective action," said S&P credit analyst David Hitchcock.
With chronic double-digit unemployment rates and a dwindling population, Puerto Rico has long run substantial budget gaps that have been reduced by about 90 percent from $3.3 billion in 2009. But the island has yet to produce balanced budgets sought by institutional investors and bond analysts.
"We believe the shortfalls against budget in fiscal 2013 will make it difficult for the commonwealth to achieve structural balance in the next two years," Hitchcock said.
In San Juan, officials of Puerto Rico's Treasury and Government Development Bank were not immediately available to comment on S&P's downgrade to BBB minus from BBB.
Another leading Wall Street ratings agency, Moody's Investors Service, in December cut Puerto Rico's overall credit rating to Baa3 to near-junk status and warned it was weighing future downgrades.
That decision by Moody's affected $38 billion of outstanding debt and was linked to Puerto Rico's weak economic outlook and worries about its under funded pension system.
"If only limited progress is made in upcoming budget cycles in significantly reducing large structural budget gaps, we could lower the rating further," S&P said on Wednesday.
A large issuer of tax-free debt, Puerto Rico pays the highest rates of any major borrower in America's $3.7 trillion municipal bond market, according to Municipal Market Data, a unit of Thomson Reuters.
The island, whose economy appears to be emerging tentatively from a six-year recession, now pays 290 basis points more on 10-year debt than an AAA-rated issuer, according to MMD. That's more than twice as much as A-minus rated Illinois, which has $83 billion of unfunded pension liabilities.
Like Fitch Ratings, another U.S. credit-ratings group that last month puts its BBB-plus rating for Puerto Rico on negative watch, S&P said it was keeping a close eye on the policies of new governor Alejandro Garcia Padilla.
"Padilla is considering a number of corrective budget actions, and has proposed what we view as major pension reform of the commonwealth's poorly funded pension system. Standard & Poor's will evaluate the fiscal effect of potential fiscal and pension reforms in determining future credit trends," the agency said.