Global credit rating agency Moody's on Monday upgraded sovereign credit rating on South Korea by one notch to 'Aa3' from 'A1', citing strong fiscal fundamentals, economic resilience and reduced external vulnerability of the banking sector. "Moody's Investors Service has today upgraded the Republic of Korea's government bond rating to Aa3 from A1. The rating outlook is stable," Moody's said in an e-mailed statement.

The upgrade came around four months after the rating agency revised up the outlook for the country's sovereign rating to positive from stable in early April. The Finance Ministry said the revised-up rating was the highest since Moody's began assessing South Korea's sovereign credit rating.

The upgraded rating was the fourth-highest among Moody's investment grades, and equaled to those of China and Japan. Fitch has assigned the same'A+' rating on South Korea as the one for China and Japan, but Standard & Poor's has assessed South Korea' s sovereign rating as'A', two notches lower than AA- for China and Japan.

The Finance Ministry said the upgrade by Moody's was expected to have a positive impact on the ratings by other two credit appraisers, noting that it will improve external funding conditions for domestic financial institutions and companies.

The upgrade was also expected to increase foreign investment into the local financial market."We expect increased foreign investor participation in the Korean government bond (KTB) market in future," said Kwon Young-sun, an economist at Nomura in Hong Kong.

Moody's attributed the rating upgrade as strong fiscal fundamentals, economic resilience and reduced external vulnerability of the banking sector as well as stable leadership transition in the Democratic People's Republic of Korea (DPRK). " Korea's strong fiscal fundamentals enable a relatively large degree of policy space to cope with contingent domestic risks and external shocks,"Moody's said in a statement, noting that the government's balance sheet has been relatively unscathed by the global financial crisis and by the eurozone crisis.

South Korea's general government budget went into a modest deficit in 2009 as a result of the global financial crisis, but it swiftly bounced back into surplus in 2010, and has remained in the black since then.

The credit rating agency also assessed the South Korean economy has demonstrated resilience to external shocks, saying that the economy's trend growth was stronger than that of the advanced industrial countries. Despite slower economic growth this year, the labor market has remained relatively healthy, Moody's said, adding that the competitive export sector will help lead a rebound as the global economy recovers.

Touching on the banking sector, Moody's said that macro- prudential regulatory measures and improved risk management has reduced banking sector vulnerabilities, stressing that local banks have lowered their reliance on short-term external funding as a share of external liabilities.

Relating to the geopolitical risks, Moody's noted that the geopolitical status quo will not be adversely disrupted by the ongoing leadership transition in Pyongyang, saying that a possible step-up in Pyongyang's economic engagement with Beijing suggests that the risk of a collapse of the regime during the leadership transition phase is diminishing.