Moody's Investors Service said on Thursday the Middle East Respiratory Syndrome (MERS) outbreak in South Korea is a credit negative for the country as the virus has weakened consumer sentiment in Asia's fourth-largest economy.

"The spread of the illness is credit negative for the sovereign, because it is dampening consumer confidence amid already-weak domestic demand, threatening to undermine an incipient recovery in economic growth," said Moody's in a statement.

"Policy stimulus measures to counter the effect on the economy could also have credit-negative side effects."

South Korea reported three more deaths on Thursday, bringing the death toll in the outbreak to 23. The virus has affected 165 patients, more than 6,500 people are in quarantine, and public fear has seen South Koreans staying home and not spending.

South Korea's finance ministry will make a decision by end-June on whether to launch a supplementary budget to counter economic weakness brought on by MERS, which Moody's said would be likely financed through bond issuances rather than tax hikes.

Moody's said looser monetary policy could inflate already-high household debt levels, referring to the Bank of Korea's decision last week to lower its monetary policy rate to a record low 1.50 per cent.

The ratings agency added the effect of MERS may be relatively short-lived and that the impact of the outbreak may be limited on the economy.

"Korea has demonstrated its ability to bounce back from shocks. Its strong fiscal position provides policy space to tackle and contain the outbreak," the statement said.

"Nevertheless, the return of growth will be more difficult now because of weak domestic demand and slowing exports."

Moody's affirmed South Korea's Aa3 issuer and senior unsecured rating and changed the outlook to positive from stable in April.

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