Increasing uncertainty as Argentina takes uncomfortable FX measures
The return of FX controls and public debt re-profiling show Argentina’s underlying economic problems have not been solved, but the Macri administration’s new measures are transitory and are only meant to meet a short-term emergency, says Tanoira Cassagne Abogados partner Alexia Rosenthal and associate Rocío Carrica.
The primary elections in Argentina, which took place on 12 August, were a landslide win for the opposition candidate Alberto Fernández and former president Cristina Fernández de Kirchner, who would serve as his vice-president.
The margin of victory, which is almost impossible to overturn in October’s general election, plunged Argentina into a deep financial crisis, devaluing the Argentine peso against the US dollar by almost 30% and wiping out stockmarket gains and increasing inflation, which was already extremely high.
President Mauricio Macri has since taken emergency measures to contain the crisis, at least until the new government takes office. These measures include the mandatory extension of short-term public bond maturities (or as the government calls, it “re-profiling”) and regulations that bring back foreign exchange controls resembling those in force during the Kirchner administrations.
Short term public bond “re-profiling”
In what some have called a surprise move, the current minister of finance, Hernán Lacunza, announced in a press conference on 28 August that Argentina would selectively re-profile short term government debt. This re-profiling affects institutional rather than individual investors (treasury bills owned by individuals shall be paid in full). Institutional investors, however, shall be re-profiled (non-voluntarily). It’s likely the government will activate CACs (Collective Action Clauses) on foreign law bonds. The goal is to re-profile maturities due in the coming 10 years.
After these announcements, Urgent Re-profiling Decree 596/19 was issued by the executive, which extends the maturity date of short-term debt directly held by non-individual investors. However, no principal or interest haircuts were enacted. The decree, later amended by Urgent Decree 609/19, makes an exception for individuals so long as they are indirect holders of these securities. In addition, it ensures that short-term debt securities that were subject to the mandatory maturity extension can be used by holders to pay certain obligations with the government, such as social security payment obligations.
Under this scenario, some concerns have been raised regarding individual investors in mutual funds that in turn had invested in short term debt securities that were subject to re-profiling. These concerns caused the suspension of operations for the majority of mutual funds in Argentina on August 29 and August 30. As a result, the finance secretary and the treasury secretary issued joint resolution N°60/19, which ensures that individual investors in mutual funds will receive the same treatment as individuals that directly hold short-term debt securities.
Consequently, Argentina’s Securities and Exchange Commission (CNV), which oversees mutual funds, issued Resolution 806/19. The resolution establishes a procedure to repay individual investors in mutual funds. The procedure involves splitting each fund’s assets to provide different treatment for individual and institutional investors.
Fund managers and custody entities are struggling to cope with all these regulations and are facing the possibility of claims from their investors, the CNV, and some consumer associations that take advantage of these situations.
Numerous issues involving short-term debt holders have not yet been addressed by the regulations and will need to be analysed by authorities so necessary amendments can be made. What it is clear is that these measures affect institutional rather than individual investors.
On 1 September, Urgent FX Decree No. 609/19 was issued, which marked the return of currency exchange controls in Argentina. Those controls were originally dismantled by the Macri administration when it took control of government in 2016.
The FX Decree says that as a result of the recent economic and financial events and the uncertainty generated by the recent primary presidential election process, it is necessary to adopt temporary and urgent measures to regulate the currency exchange regime and strengthen the economy.
The FX Decree establishes that until 31 December, exporters must liquidate their foreign exchange earnings; and the Central Bank will decide when the purchase of foreign currency requires prior authorisation. The Central Bank will make its decisions based on objective guidelines and subject to macroeconomic conditions while distinguishing the situation of individuals from that of legal entities. The Central Bank then proceeded to issue Communication “A” 6770 detailing the foreign exchange restrictions that will be in effect until 31 December. The main provisions are described below:
Good exporters are required to liquidate their foreign exchange proceeds within a set time frame. The proceeds will then be entered and settled in the local exchange market. Export payment proceeds may be used to cancel advances and pre-export financing loans under certain conditions.
Likely, all proceeds related to services exports payments must be entered and settled in the local exchange market.
Argentine residents’ access to the FX market for investment purposes
Argentine residents must request Central Bank authorisation to access the exchange market for investment purposes, and for the constitution of all types of guarantees. Individuals must also obtain Central Bank authorisation to access amounts exceeding US$10,000 per month. However, these restrictions do not affect the possibility of foreign currency transfers made by individuals from their own local foreign currency accounts to their bank accounts abroad.
Non-residents’ access to the FX market
Non-residents must obtain Central Bank authorisation to access the foreign exchange market when purchasing currency worth more than US$1,000 per month. Certain exceptions apply, such as diplomatic and consular representations.
Foreign financial debt
All new foreign financial debts that are disbursed must be settled with the local foreign exchange market for the resident to get access to the market to repay these debts.
No FX access for the payment of debts between residents
Access to the exchange market for the payment of debts and other obligations in foreign currency among Argentine residents is prohibited for the rest of 2019. Some specific exceptions apply.
Central Bank approval is needed for the payment of dividends abroad.
Restriction of payment services to related parties
Central Bank approval is needed for the payment of services abroad if the counterparty is a related company.
Exchange and arbitration operations
Exchange and arbitration operations may be carried out with clients without the Central Bank’s prior approval if they are implemented as individual operations traded against pesos.
Restrictions to the purchase and sale of securities (Contado con Liquidación)
Entities which are authorised by the Central Bank to perform exchange operations may not purchase securities in the secondary market that are settled in foreign currency or use holdings from their general exchange position for payments to local suppliers. This provision aims to limit the purchase of foreign currency, which is commonly done through the purchase of securities that can be bought in Argentina as pesos and later sold in foreign markets in return for foreign currency.
It is important to note that purchase of securities that are settled in foreign currency can still be performed by stockbrokers, which are not under the Central Bank’s control
Obligation to report foreign debt
For residents to access the foreign exchange market to pay financial and commercial debts abroad, they must report the existence of the debt to the Central Bank beforehand.
The criminal foreign exchange regime is applicable
All operations that do not comply with the aforementioned provisions shall be subject to the sanctions established by the Criminal Foreign Exchange Regime.
The foreign exchange controls measures are extreme and temporary measures which aim to contain the peso’s devaluation against the US dollar and to stop further inflation. However, it is clear that all financial activities are affected by these measures and that there is a lot of uncertainty with regards to how these measures will have an effect.
Finally it is important to note that both the Re-profiling Decree and the FX Decree were enacted as urgent decrees, and are subject to congressional review and approval.
Foreign exchange controls were one of the measures that Macri specifically criticised during his election campaign before taking office. In fact, one of the government’s first measures was to settle claims with holdout investors, which allowed Argentina to re-enter the international capital markets and end foreign exchange controls. This put the peso under a managed float regime.
As a “market-friendly” government, the message Macri sent to the world was his intent to liberate government barriers to the economy. However, the base economic problems that led to exchange controls were never properly solved. This was clearly exposed by the primary election results, which showed voters felt their basic needs had not been met and that the economy was still too fragile to forgo the need for exchange controls.
The government, after the August elections and against its own principles, could not stand still and watch foreign currency reserves leave the country. However, foreign exchange controls have been presented by the government as a temporary measure. The government is aware of the negative impact these controls entail. Moreover, the minister of finance has agreed that the measures taken were highly unpleasant, but something the government had no choice but to enact.
During the first days after the FX regulations were approved, the exchange rate appeared to stabilise. However, there are a lot of questions from local companies about how they could move forward with their operations. This is because the regulations are very broard and more clarifications are yet to be issued. Finally, as many of the FX transactions need prior authorisation from the Central Bank, the government is emphasising that approval will be granted in each case on an objective basis, free of any discretion and with a pro-business vision. It has adopted this position to differentiate it from the previous Kirchner administrations and, potentially, the new administration.
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