Nov. 5 (Bloomberg) -- South Africa must cut its fiscal deficit, projected to be the highest since at least 1961, to retain its credit rating, Standard & Poor’s said.

“Running the kind of deficits they are running at the moment is not sustainable for too long,” Konrad Reuss, S&P’s managing director for sub-Saharan Africa, said in an interview at a conference in Cape Town today. “Over the next three years we really need to see a return to lower deficits and a reversal in debt dynamics. That’s in the context of South Africa retaining its current rating.”

Finance Minister Pravin Gordhan said Oct. 27 the budget gap will surge to 7.6 percent of gross domestic product in the year through March 2010, double the government’s February projection, as an economic contraction cuts tax revenue. S&P had “penciled in” a fiscal shortfall of 6 percent, Reuss said.

The debt-rating firm lowered its outlook on South Africa to negative from stable in November last year on concern that a slowdown in the $277 billion economy, Africa’s biggest, would damage the country’s creditworthiness. S&P rates South Africa BBB+, the third-lowest investment-grade ranking.

The economy, in its first recession in 17 years, will contract by about 1.9 percent in 2009, Gordhan said in his mid- term budget statement last week. The government expects to collect 70 billion rand ($9.1 billion) less in tax this fiscal year than forecast in February due to the economic contraction, he said.

‘Achilles Heal’

“In the medium term we need to see a return to fiscal consolidation,” said Reuss. “South Africa doesn’t have room to maneuver or the flexibility of other emerging markets because of its large current-account deficit.”

South Africa relies on foreign purchases of its stocks and bonds to fund the shortfall on its current account, a measure of trade in goods and services, which narrowed to a five-year low of 3.2 percent of GDP in the second quarter. Foreigners purchased a net 85.2 billion rand of South African assets this year, according to the JSE Ltd., which runs the country’s stock and bond exchanges.

“A bout of risk aversion could easily see those portfolio flows reverse,” said Reuss. “That’s why the current account deficit has always been an Achilles heel of the South African story.”

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net

Last Updated: November 5, 2009 05:47 EST