The outbreak of Middle East Respiratory Syndrome in South Korea is negative for the country's credit rating as the contagious disease has dampened consumer sentiment in Asia's fourth-largest economy, Moody's Investors Service said Thursday.

South Korea on Thursday reported three more deaths, bringing the death toll to 23. Confirmed cases stood at 16, with more than 6,700 people in isolation for possible infection after coming in close contact with MERS patients.

"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," Moody's said in a statement.

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

Personal consumption growth has remained weak since 2011, averaging 2 percent year over year on a real, seasonally adjusted basis. A slight rise to 1.6 percent in the first quarter of this year from 1.4 percent in the previous quarter is likely to reverse as a result of the MERS outbreak, the credit ratings agency said.

Moody's warned looser monetary policy could inflate already-high household debt levels, as the household debt amounted to 73.3 percent of Gross Domestic Product at the end of last year.

It is similar to levels in some of the most indebted advanced economies.

"The outbreak could lead to increased budgetary spending, although the amounts currently in play are modest," Moody's said.

"The government is also considering a supplementary budget, which it is likely to finance through bond issuances rather than tax increases, to avoid further suppressing domestic consumption."

The ratings agency said the virus's impact will be short-lived as shown in the experience of Severe Acute Respiratory Syndrome in 2003, noting its strong fiscal position provides policy space to tackle and contain the outbreak.

Moody's affirmed South Korea's Aa3 issuer and changed the outlook to positive from stable in April. (Yonhap)