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Effective April 19 2001, the Central Bank of Chile decided to remove the restrictions imposed on foreign exchange transactions. To many economists this decision represents the last step of a gradual deregulation process started by the Central Bank in 1998.

These reforms are aimed at eliminating bureaucratic formalities imposed on foreign investments that only contributed to increased transaction costs, while at the same time encouraging investors to take advantage of Chile's financial and commercial integration more efficiently, increasing the growth potential and risk diversification of the Chilean economy and boosting the inflow of capital into Chile which, over the last few months, has lost its dynamism.

The provisions of the new Compendium of Rules on Foreign Exchange (CRFE) eliminated the restrictions that were imposed on the transfer, holding and remittance of foreign currency from and into Chile, which had included:

  • the Central Bank's prior approval to bring into the country foreign currency associated with credits, investments, capital contributions, bonds and American Depositary Receipts (ADRs);
  • the Central Bank's prior approval to remit capital associated with credits, dividends and other benefits in connection with capital contributions, investments and prepayment of foreign credits;
  • the Central Bank's prior approval to return capital, profits or other benefits associated with investments made by Chilean residents abroad;
  • restrictions related to the stipulation of special prepayment and acceleration clauses in foreign credit agreements;
  • restrictions with respect to the minimum risk rating and duration of the bonds issued by local companies. Until now, bonds were required to have a minimum duration of two years. This change will result in a broad scope of instruments being issued by local companies. A minimum risk rating for bonds was also eliminated, allowing local companies with no or high risk rating to have access to debt markets;
  • restrictions with respect to the currencies in which companies are allowed to borrow or issue foreign debt;
  • restrictions related to the issuance of ADRs. From now on, in order to issue ADRs, Chilean companies will not need to increase their equity capital and will be able to freely convert their Chilean shares into ADRs.
  • mandatory deposit with the Central Bank (encaje) imposed on foreign credits. The elimination of the encaje - which was set at 0% - is perhaps the measure that gathers the biggest support from private economic agents. The encaje operated as a tax on foreign credits that entered into the country under the CFER. This mandatory deposit, which at the time it was established amounted to 30% of the amount of the loan, had to be made in the same currency in which the foreign credit was disbursed, did not gain interest and had to remain with the Central Bank for a period of one year regardless of the maturity of the loan concerned. The Central Bank, however, avoided the deposit requirement by giving to the borrower the possibility of paying interest (at the Libor interest rate plus 4%) on the amount that would have been otherwise subject to the deposit requirement.

In addition to the removal of these restrictions, the CRFE gives importers and exporters the option to carry out international trade transactions through the informal foreign exchange market. Should importers and exporters opt for this alternative, they are required to properly report the transaction to the Central Bank.

In order to provide investors with accurate information on which they may base their economic decisions, the provisions adopted by the Central Bank established that all financial foreign exchange transactions will continue to be channelled through the formal foreign exchange market, which is comprised by the banks and those exchange entities, broker-dealers and stockholders specially authorized by the Central Bank. Therefore, investors will continue to be obliged to inform the all such transactions after they are effected.

Jorge Carraha

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