Exception to the “encaje” for multilateral credit agencies

On December 21, 2006, the Ministry of Economy and Production (the “Ministry of Economy”) issued Resolution No. 1076/06 adding a new exception to the obligation established by Articles 4(c) and 4(d) of Decree No 616/05 to make a non-transferable interest-free deposit commonly referred as “encaje” (the “New Resolution”)[1].  The New Resolution was published in the Official Gazette on January 5, 2007. 

Decree No 616/2005 stated that the encaje would apply to foreign exchange inflows into the foreign exchange market derived from:

(a)   financial sector and non-financial private sector financial liabilities, except for primary issues of debt instruments listed and traded in self-regulated markets; and

(b)   non-resident portfolio investment in

(i) domestic currency holdings,

(ii) financial sector and private non-financial sector assets and liabilities, insofar as they do not relate to the primary subscription of debt instruments listed and traded in self regulated markets, and/or primary subscription of shares of resident companies listed and traded in self-regulated markets; and

(iii) acquisition of a right in secondary markets over government securities.

The encaje consists of a non-transferable interest-free deposit in U.S. dollars equal to 30% of the amount of foreign currency transferred into Argentina and sold for Pesos in the local foreign exchange market.  This deposit must be made in a local financial institution for a 365-day period and registered in the name of the individual or legal entity executing the foreign exchange transaction. The deposit cannot be used as collateral for any credit transaction.

The Ministry of Economy has already set out certain exceptions to the encaje in Resolution No 365/2005.  Notwithstanding, Resolution No 637/2005 of such ministry provided that all inflow of funds into the local foreign exchange market to subscribe to the primary issuance of securities, bonds or certificates of participation issued by a trustee of a trust, with or without public offering and listing in self-regulated markets, must comply with the encaje if applicable to the inflow of funds to the local foreign exchange market for the acquisition of any of the underlying assets.

The New Resolution states that it is necessary to extend the scope of the exception to the encaje introduced by Resolution No 365/2005 in order to increase the chances of access to funding sources.

The exception introduced by the New Resolution applies to the inflow of funds to the local foreign exchange market which are to be allocated by multilateral and bilateral credit agencies or through their related agencies, to the primary subscription of certificates of participations, bonds or debt securities issued by trusts, provided the following conditions are met:

(a) the funds must relate to an exposure to be kept with a multilateral or bilateral credit agency, or through their related agencies; and

(b) the funds must be allocated to financings that meet the following conditions:

(i) they are non-financial investments, and

(ii) their average life is of not less than two years, including repayment of principal and interest.

The Argentine Central Bank has clarified that “non-financial investments” means:

(a) investments to be treated as fixed assets (property, plant and equipment) in the balance sheets (with certain exceptions if funds are to be used to pay imports) (Communication “C” 42303);

(b) intangibles for mining costs and costs of investigation, prospecting and exploration (Communication “C” 42884);