Argentina has defied skeptics by posting almost a decade of rapid growth without significant foreign investment. But the South American country may soon wish it had attracted more as President Cristina Kirchner's pro-growth policies show signs of fatigue.
Last year, Argentina again trailed several of its smaller neighbors in drawing foreign investment, according to the United Nations annual report on foreign direct investment in Latin America and the Caribbean.
As the region's third-largest economy, Argentina ranked sixth last year as a destination for FDI, with inflows of $7.24 billion. Sequentially, it lagged behind Brazil, Mexico, Chile, Colombia and Peru. Argentina has now ranked fifth or sixth in the FDI table since at least 2006.
Equally telling is what locals think of the investment opportunities at home. A measure of capital flight tracked by the central bank almost doubled, to $21.5 billion in 2011 from the year before. Last year was marked by general elections, in which Kirchner was reelected in a landslide.
Kirchner's policies include restrictions on prices, imports, and the ability of firms to send money abroad, and have clearly made investors pause.
But that hasn't stopped Argentina from posting enviable growth rates.
The economy expanded 8.9% in 2011, after growing an average of 7.6% a year between 2003 and 2010, according to the government. Though the government statistics agency denies it, analysts say those figures are probably overstated by several percentage points. In any event, few deny that Argentina has enjoyed one of its longest periods of growth in generations.
Argentine farm exports such as soybeans fetch high prices, while manufacturing has enjoyed a renaissance thanks to strong demand from Brazil and what until recently was a cheap currency.
But that's only part of the story. Loose monetary policy and heavy government spending on subsidies, social programs and public works have also goosed the economy.
Rapid growth has come at the expense of annual inflation that most private sector forecasters say is between 20% and 25%. Ominously, recent data suggest the economy will grow at a much slower pace this year, while 12-month inflation expectations are at 30%.
Morgan Stanley economist Daniel Volberg said Argentina might be hard pressed to attract more foreign investment now that cracks are starting to appear in the economy.
"What you need to see is a shift in business climate and economic policy to generate expectations that the economic model is sustainable in the long term and that foreign investment in Argentina is safe and profitable," he said.
Instead, Kirchner has expanded the state's already large role in the economy. After her reelection in October, Kirchner implemented capital controls and import barriers to protect the central bank's foreign currency reserves that she uses to pay creditors.
Earlier this month, Kirchner expropriated a 51% stake in Argentina's biggest oil company, YPF SA (YPF, YPFD.BA) from Spain's Repsol YPF SA (REP, REPPY.) That was Kirchner's biggest nationalization since seizing about $28 billion in private pension savings in 2008.
The government has also increased pressure on companies to substitute imported goods for locally made products or to get into the export business. That has given rise to bizarre trade deals like car companies agreeing to export chicken feed, wine, olive oil and rice in exchange for import permits.
Not even foreign investors that follow the government's script have been exempt.
Earlier this year, Italian tire maker Pirelli & C. SpA (PC.MI) agreed to export about $100 million in honey to offset its import bill even after it pledged to invest $300 million to build a new tire factory in Argentina.
Industry Minister Debora Giorgi summed up the government's import substitution policy in recent comments.
"We believe in 'carrot and stick' managed trade; that way we get multinational companies in all sectors to come and produce in Argentina," she said.
The Industry Ministry didn't respond to a phone call and email seeking comment.
Coloring the FDI debate are vast untapped natural resources that one day could turn Argentina into a major foreign investment destination.
Argentina shares the mineral-rich Andes mountains with mining nations Chile and Bolivia. It's also home to the world's third-largest reserves of shale gas, according to the U.S. Energy Information Agency.
Barclays Capital economist Sebastian Vargas doesn't think Argentina's already modest FDI inflows can go much lower. Mining and energy will probably attract some foreign investment given the opportunities in those sectors, he said.
"The relevance of these investments will depend on the administration's capacity to convince investors that the YPF nationalization is limited to this company in particular, and will not extend to other sectors or companies," Vargas said.
-By Ken Parks, Dow Jones Newswires; 54-11-4103-6740, firstname.lastname@example.org