More flexibility in the Foreign Exchange Market

Last March 4, 2005, the Central Bank of the Republic of Argentina (“Central Bank”) issued a series of communications to make current regulations on the foreign exchange market (Mercado Único y Libre de Cambios or “MULC”) more flexible.

Some analysts have interpreted these communications as a necessary change in the Central Bank’s monetary policy, and a collaboration with the Ministry of Economy’s goal of maintaining the U.S. Dollar exchange rate near AR$ 3.

Following is a brief summary of the main characteristics of each of the communications.

1.     Communication “A” 4305

This communication regulates the information regime on direct and real estate investments of non-residents in Argentina and of residents abroad, created by Communication “A” 4237 dated November 10, 2004, by establishing the limits and periodicity of the reports. The due date for filing the first report is March 31, 2005.

In the case of investments in Argentina of non-Argentine residents, filing is mandatory only if the value of the holding, calculated on the basis of the net worth of the company or tax value of the real estate investments, reaches or exceeds US$ 500,000.

In the case of investments of Argentine residents abroad, filing is mandatory if the value of the holding, calculated on the basis of the net worth of the company or the tax value of the real estate investments, reaches or exceeds US$ 1,000,000. However, if such holding does not exceed US$ 5,000,000, filing can be made at the end of each calendar year (for more information on this issue please see “New Regulation of the Information Regime on Direct and Real Estate Investments” in this edition of Marval News).

2.     Communication “A” 4306

It modifies as from and including March 7, 2005, Section 1 of Communication “A” 3909, dated March 27, 2003, including “donations” to the list of concepts that the Central Bank has authorized for purchase of foreign currency in the MULC to make portfolio investments abroad (usually called “treasuring”).

According to Communication “A” 3909, Argentine residents must obtain prior Central Bank approval for purchases of foreign currency in the MULC for investment purposes in excess of an aggregate US$ 2,000,000 per calendar month, or the total amount of Pesos paid as export duties, plus three times the amount paid as tax on credits and debts in the prior calendar month.

3.     Communication “A” 4307

On July 26, 2004, Communication “A” 4178 authorized the private non-financial sector to purchase foreign currency in the MULC to make portfolio investments abroad for purposes of then using such foreign currency to repay outstanding principal and interests of financial debts.Such investments and their interests were to be used to cancel financial debts within 90 days following access to the MULC.One of the conditions for this transaction was that the amount of foreign currency held abroad should never exceed the total amount of debt due for the following 90-day period.

Communication “A” 4307 extended the period to use the portfolio investments to cancel debts from 90 to 360 days; and established that the amount of foreign currency held shall never exceed the total amount of debt due for 360 days following the purchase of foreign currency in the MULC.

4.     Communication “A” 4308

On September 9, 2002, Communication “A” 3727 established that all securities transactions traded within self-regulated entities and stock exchanges must be settled exclusively in Pesos, and suspended transfers of securities against foreign currency delivered outside Argentina (“wire transfer”), which was a usual transaction.

Communication “A” 4308 dated March 4, 2005, brought in two important innovations. In the first place, it reinstated the suspended transaction and set forth that securities traded in local markets can be paid in (i) Pesos, (ii) foreign currency by means of wire transfer of funds from or to current accounts held in Argentine financial entities, and (iii) through wire transfer to accounts held outside Argentina. However, payments in cash with foreign currency or by a deposit in custody accounts or third party’s accounts are still not allowed.

Second, the communication also authorizes financial entities to use funds from their foreign exchange position (posición general de cambios) or purchase foreign currency in the MULC to pay local securities traded in self-regulated entities and stock exchanges, for their own accounts or for the accounts of their clients, whether these are residents or not. Later, the Central Bank issued the Communication “C” 41164 which states that these transactions by financial entities are going to be considered as foreign exchange transactions, and must be reflected in the corresponding foreign exchange forms.

The Central Bank established a maximum limit for the transactions carried out by financial entities: the total amount of purchases and/or sales of foreign currency resulting from transactions with securities shall never exceed, in the latest three calendar months, 5% of the capital stock (responsabilidad patrimonial computable) of the financial entity, calculated in U.S. Dollars at the reference exchange rate informed by the Central Bank.