SEOUL - Ratings agency Moody's Investors Service Monday upgraded South Korea's sovereign credit rating, citing strong fiscal fundamentals and resilience to external economic shocks.

Moody's lifted South Korea's government bond rating by one notch to Aa3 from A1, saying their balance sheet has been relatively unscathed by the global slowdown and the eurozone financial crisis.

"Strong fiscal fundamentals enable a relatively large degree of policy space to cope with contingent domestic risks and external shocks," it said, while maintaining its stable outlook on Korea's rating.

Reduced external vulnerability of the banking sector and a continued status quo with neighbour North Korea despite the leadership transition in Pyongyang were among other reasons for the upgrade, it said.

"A possible step-up in Pyongyang's economic engagement with Beijing... suggests that the risk of an collapse of the communist state during the leadership transition phase is diminishing," it said.