Arjuna Mahendran In Trouble: Three Member Committee Recommends Full Scale Investigation

From Asian Mirror

Asian Mirror is now in a position to state that the three member committee appointed to investigate the controversial Treasury bond issue  has recommended that the incident ‘warrants an investigation'. This outcome is likely to throw Central Bank Governor Arjuna Mahendran into hot waters as he has been dubbed by many parties as the person who is responsible for the Treasury Bonds controversy.

The committee headed by Attorney-at-Law Gamini Pitipana completed its preliminary investigations on Friday and the report is expected to be handed over to Prime Minister Ranil Wickremesinghe in the coming days. The Prime Minister has already promised Parliament to table the recommendations of the committee.

If the committee recommends a full scale investigation into the matter, the matter is likely to end up at the Police Financial Crimes division, headed by DIG Ravi Waidyalankara. If this is the case, one has every reason to believe that the Central Bank Governor Arjuna Mahendran too will have to spend an hour or two at the Financial Fraud Division, facing lengthy interrogations by the Police.

This entire process will also investigate the conduct of Arjun Aloysius, who is the son-in-law of Mahendran. The young and controversial businessman came under public spotlight even before the questionable treasury bonds issue. He was closely involved with the notorious ex-CB governor especially when the latter dabbled with hard-earned EPF funds of the private sector employees.

However, it is clear that Mahendran has decided to remain in his position, despite the outcome of the committee's investigation. Recently, when one of his close friends asked him about his future plans, Mahendran, who is known to be citizen of Singapore, said he would remain in Sri Lanka and clear his name!

Ranil names and shames media

Prime Minister Ranil Wickremesinghe today named and shamed some media institutions for giving the impression that the public are losing faith in the Government.

Making a special statement in Parliament on the bond issue, Wickremesinghe specifically named The Daily Mirror, The Sunday Leader and a private television station over its recent reporting.

The Prime Minister slammed The Daily Mirror for demanding that the Governor of the Central Bank Arjuna Mahendran resign over the bond issue.

Wickremesinghe also questioned the owners of The Sunday Leader newspaper demanding to know where they got money from to operate a newspaper.

Listen to the speech:-

http://colombogazette.com/2015/03/17/ranil-names-and-shames-media/

(Cut & paste)

The United National Party (UNP) leader accused some of the private media owners of having benefitted from former President Mahinda Rajapaksa.

Wickremesinghe also accused a private television station of carrying out a campaign against him and called for the establishment of an independent broadcasting authority to ensure ethical and fair conduct.

“I will listen to the public and not the Maharajas,” he added.

The Prime Minister also said that some Parliamentarians, including himself, are like angels when compared to some politicians and others.(Colombo Gazette)

Sri Lanka controversial primary dealer's license could be cancelled: CB Governor

By Asantha Sirimanne

COLOMBO (EconomyNext) - The license of a gilt dealership connected to his family could be revoked if a probe faults the firm over controversial transactions, Central Bank Governor Arjuna Mahendran who is to go on leave while the investigation is made, said.

Sri Lanka has been rocked by allegations that Perpetual Treasuries, a gilt market dealer connected to Mahendran's son-in-law engaged in a series of deals in the secondary and primary government securities market based on insider information that interest rates would go up on February 27.

Dealer License

Mahendran said if a committee that is investigating the issue found fault with the firm its primary dealer license may be cancelled.

"But I do not want to pre-judge (the report by the investigating committee)," he said.

Licensed primary dealers are allowed to bid at the primary auction of Treasury securities and they also have access to a lender of last resort window of the Central Bank.

Mahendran said he will go on leave and handing over operations to Senior Deputy Governor P Samarasiri while a committee investigates the matter.

"But I will be in Sri Lanka and available to assist the investigation in anyway," he said.

President Maithripala Sirisena ordered a probe into alleged irregularities in bond markets last week, and members of the investigating committee was named by Prime Minister Wickramasinghe.

There had however been concerns by opposition parties that they were all lawyers with no in depth knowledge of gilt markets and connected to the United National Party and his old school Royal College.

Unusual Trades

Perpetual Treasuries was seen selling among other securities, 7-year bonds, in the forward markets on or around February 26 dealers have said, to be bought back the following week at a profit when rates went up.

The firm also made unusually large bids, especially for an independent primary dealer at an auction of illiquid 30-year bonds, including a 3.0 billion rupee bid which was backed up with financing from a state bank. The firm is alleged to have made bids of 2.0 billion rupees on its own account.

After calling bids for only a billion rupees of 30-year bonds, the Central Bank accepted 10 times the volume and half of t went to Perpetual Treasuries, with 3.0 billion at 12.5 percent.

The weighted average yield at 11.73 percent was also sharply higher than the 9.3 and 9.6 percent rates at which 30-year bonds were sold through private placements in recent months.

Also on Friday, the Central Bank tightened monetary policy closing a 5.0 percent window where excess cash was parked, pushing the floor overnight rate to the 6.5 percent window, shifting the entire yield curve upwards.

The move came days after the regular monthly monetary policy statement on Tuesday 24 February.

No Wrongdoing

Mahendran denied wrongdoing related to the 30-year bond auction, and said the Central Bank decided to move into a fully auction-based system abandoning private placements, which could have led to some of the outcomes.

"I am very clear in my mind that I have not done anything wrong," he said. "We have changed the earlier system of having private placements.

"Auctions will now be the norm, private placements will be the exception."

Bond market participants however were not told clearly last month that the Central Bank would move to a pure auction based system or that a large volume would be accepted.

Mahendran said "messaging may have got garbled," but in the future, auctions would determine the interest rate.

He said 10 billion rupees was accepted because the government was in need of extra cash.

Mahendran said there were instances in the past where the Central Bank has accepted sharply higher volumes that offered including a recent Treasuries auction where 2.0 billion rupees was offered and 13 billion accepted.

But market participants have been unhappy even earlier that the Central Bank's practice of offering lower volumes and accepting higher volumes mislead the market and following the latest event that it also leaves room for someone with inside information to make bids at high rates.

More Transparency

Such practices were also followed in dollar bond auctions. By offering small amounts to the market, the debt office intended to lull market participants into the false belief that only a little money was needed and then snap up all the bids that came at low prices, dealers believe.

Though this created uncertainty at the first auction where larger volumes were accepted, but dealers later bid expecting higher amounts to be accepted.

But sudden very large volumes can still surprise dealers.

It also may result in the government paying higher than necessary rates. In the controversial 30-year auction, so-called 'dummy bids' placed by several dealers without much expectation that they would be hit at above 11 percent and also 12.5 percent, were also accepted.

Analysts say the debt office should also have borrowed more short term money where there was greater liquidity and willingness to lend, instead of selling 30-year bonds and committing the government to high interest rates for a long period.

If rates fall soon with foreign dollar borrowings by the government large profits can be made by holders of long-bonds by dumping them on long term insurance or pension funds.

If fiscal policy will get better in the next few years and inflation will also be low, the supply of long bods should be reduced so that the yield curve is flat as possible, if not inverted, economic analysts say.

Most markets participants agree that going for a pure auction based system better, but rates would have perhaps been lower if the process was well communicated and also stronger indications given about the planned sovereign bond sale.

The closing of the 5.0 percent window was also good, but best practice demands that such monetary tightening should be done within the regular monthly policy statement, analysts say.

In order to make markets transparent and not leave room for insider dealing, analysts say the debt office should communicate the exact borrowing requirement.

The debt office should also publish cut-off rates. The Central Bank stopped publishing cut-off rates in the 1990s and reporters and dealers now have to call many market participants to find the cut-off yield and even that is an estimate.

Another option is to abandon the current multiple price auction and go for a single price auction, with non-competitive bids are also allowed like in the United States.

The Employees Provident Fund could also be allocated all or part of the bonds on a non-competitive basis, which will also clear allegations that it is mis-used for financial repression.

More Submissions In Defence Of Arjuna Mahendran

From Colombo Telegraph – By Sarath de Alwis

‘No one should abandon duties because he sees defects in them. Every action, every activity, is surrounded by defects as a fire is surrounded by smoke.’ – The Bhagavad Gita

The Gita was meant for the saintly and not the demonic. The 100 days government has both the saintly and the demonic.

These submissions are made in the hope that the President of the Republic would heed the advice of Krishna and resolve the riddle of the two Arjunas.

This business of Bonds currently under the spot light is perhaps a good omen. It reminds us that in addition to governance being good or bad it could also be ugly. But not to the Present Prime Minister. At a political rally yesterday, he dismissed the entire controversy as a nonevent. Some people he said were susceptible to bad dreams during day time. With that pseudo Freudian flippancy he seemed satisfied that the matter was resolved. He does not realize how ugly his governance style ids. That is understandable. Ugliness lies in the eye of the beholder. It is for the nation to instruct him on the ugly and the beautiful.

The likes of Harsha, Eran, Ajith and Sujeewa exuberant in opposition seem to be exculpatory experts in Government.

The four young UNP parliamentarians are selected for censure because of this writer’s firm conviction that they indeed wanted good governance. This in sharp contrast to their leader and deputy leader who were the last to board the ferry to freedom in response to the call from Ven. Sobhitha thero. For weeks prior to the elections John Amaratunge was assuring the pious that the visit of the Holy Father was not in jeopardy. Nothing would change on the morning of the 9th of January. Part of the problem of the UNP cabinet is that they still cannot believe that it is real!

The unfolding events surprises none but the naïve. The UNP administration is an equally nepotistic web of shadow interest groups. It encompasses a corporate cartel that has stakeholders from both sides of the political divide. The reenlistment of R. Paskeralingam, president Premadasa’s Kautilya as an advisor to the Prime Minister indicates Ranils economic trajectory. No doubt he will educate the young Harsha how to maneuverer in Washington and London and practice free market economics with a conscience.

The present controversy rests on the public perception that the primary dealer connected to the son in law of the Governor has put in a bid for Rs. 5 billion directly and through the Bank of Ceylon.

It is alleged that it was based on information that was not available to others. Strangely the role of the Bank of Ceylon has hardly surfaced. The Bank of Ceylon is now headed by Ronald Perera P.C. He is a high profile member of the UNP Working Committee. Obviously the impugned insider information would have been available to the Bank of Ceylon as well. Information not available to the public may be of value not only to the primary dealer but to the associated bank as well.

Mr. Ronald Perera being the astute lawyer that he is would not have permitted his Bank to participate in an exercise   prohibited under the law. In bond trading, information that is not available to the public is an asset.

Now we read in news reports that the three members of the Probe Committee who will probe the Bond issue have been selected by Mr.Daya Pelpola another legal eagle in the UNP working committee.

The central bank explains the present auction system. “ . Since 2000, all auctions are conducted electronically using an on – line system. Before each auction, the debt authority accesses the potential investors via primary dealers to make sure the availability of funds for the full subscriptions. Private placements of Treasury bonds also take place as a contingency to accommodate unexpected borrowings to avoid market shocks by offering large volumes to the auctions and cancellation of planned bond auctions.”

Emphasis mine.

It is possible that Arjun senior is more of a pawn in a larger design. Mesmerized by the romance of two Arjuns, the media and the public have ignored the contextual reality.

The system has not been dismantled. Ranil Wickremesinghe does not want the system dismantled. With the political change of 8th January effectively contained, isolated and quarantined the UNP leadership is on a stampede to dispense patronage. It has drawn a line on the sand and demonstrated who benefits under the new rule. The 8th January change has benefited not the ‘Gama Ralas” but the ‘Gama Kannas’. It is in the interest of the UNP to keep the present system. It allows no one to come to power who is not prepared to play the old corrupt game. That explains the influx of old advisors returning from exile. The term exile needs to be stressed. None of the Presidential advisors fall in to that category. The returning exiles are not advisers. They are performance who were taken by surprise when Chandrika decided thus far and no further.

Arjuna Mahendran gave up a lucrative career in International Banking and his Singapore Citizenship. He was persuaded to take over immediately. His nationality issue was resolved by fast tracking the process.

Had he waited till April to take over, the bond fiasco would have been under the watch of someone else or there would have been no fiasco at all.

Even if he was not the Governor of the Central Bank, the Bank of Ceylon would have been associated with the transaction that is now under the spot light.

According to news reports, the three members of the Probe Committee have been selected by Mr.Daya Pelpola another legal eagle in the UNP working committee.

This writer in an article published on 26th January wrote ‘It is difficult to comprehend the urgency in appointing a Governor of the Central Bank for a term that extends beyond 100 days when the more transparent option would have been to appoint the most senior Deputy Governor for a short-term pending the implementation of good governance parameters which would include the selection of the Governor of the Central Bank.”

Arjuna Mahendran is an exceptionally bright mind. He would have realized the perils that awaited him in the incestuous world of the money market in Sri Lanka. It is very likely that he was handpicked not only for his Banking Brilliance but also for his class allegiance and privileged access to Camelot on Fifth Avenue. Ranil is an impatient leader. He is inspired, devious, ruthless and pragmatic more than principled. His interview to the Indian press on the eve of the Modi visit nearly ruined the delicate diplomacy of Mangala Samaraweera.

The current situation is exceptional. It calls for civic mobilization around the values of a people’s democracy. The nation is not privy to the whole truth about who made what decisions. Mr. Daya Pelpola and Mr. Ronald Perera are not the best qualified to tell the nation the details. We can observe the writing on the wall. As we get closer we should be able to decipher the scrawling. The grafting of the oligarchy to political power over the last decade has fundamentally altered the values in public life.

The hardest thing of all is to find a black cat in a dark room, especially if there is no cat. The UNP working committee seems to know where the cat is.

In Defense Of Arjuna Mahendran

From Colombo Telegraph -By Sarath de Alwis 

“I am time, the destroyer of all; I have come to consume the world. That one is dear to me who runs not after the pleasant or away from the painful, grieves not, lusts not, but lets things come and go as they happen.” The Gita

Money markets need laws, rules and regulations. The integrity, competence and judgment of the Monetary Authority is what is at stake today. Lee Kwan Yew in his memoirs describes how he set up the capital market in Singapore and dismissed critics who complained of overregulation. ‘In Hong Kong what is not expressly forbidden is permitted; in Singapore what is not expressly not permitted is forbidden’.

Arjuna Mahendran

To take up the assignment, Arjuna Mahendran gave up a lucrative career in International Banking and his Singapore Citizenship. When he sought more time, he was persuaded to take over immediately and his nationality issue was resolved by fast tracking the process.

Had he waited till April to take over, the bond fiasco would have been under the watch of someone else or there would have been no fiasco at all.

The rocket science of bond trading is explained by a central banker in a paper presented in 2008. The Additional Superintendent of Public Debt Department Central Bank of Sri Lanka Mr.C.P.J. Siriwardene explains the growth of the Bond Market.

Treasury bonds are traded through competitive auctions conducted by the Central Bank on a regular basis. Primary dealers who have been involved in the government debt market since 1992 have direct access to the primary auctions. According to the present regulatory framework, primary dealers should subscribe the entire sale and single primary dealer minimum investment level is set at 10 per cent of the volume of sale to avoid any possibility of under subscription. The present auction system is on multiple price basis. Since 2000, all auctions are conducted electronically using an on – line system. Before each auction, the debt authority accesses the potential investors via primary dealers to make sure the availability of funds for the full subscriptions. Private placements of Treasury bonds also take place as a contingency to accommodate unexpected borrowings to avoid market shocks by offering large volumes to the auctions and cancellation of planned bond auctions. Successful 21 bidders are informed on the same day of the auction and the settlement is two days after the auction (T+2 system). Since the establishment of the primary dealer system, the Central Bank continued its role as a debt manager to develop the primary dealer system. They include streamlining of dealers (removing nonactive dealers, appointing new dealers, etc.), introducing necessary regulatory framework for dealers and building up close relationship between primary dealers and the Central Bank.

Dr. Harsha De Silva the Deputy Minister of Planning has announced that the committee of three lawyers will examine all issues and trace any irregularities up to 2012. His erudite posturing and justifying of three mediocre lawyers on a voyage of discovery tracing misdeeds up to 2012 amounts to bottom trawling for red herrings.

This writer did not know who Mr. Gamini Pitipana was until learning that he was to be the chairman of the probe committee. These days Google does much more than Dunn & Bradstreet. So the name was googled. What  appeared was mind goggling. Royal College Class of ’72. Attorney at Law. Apollo foods Private Ltd. In the absence of any further information from the usually expansive ,Dr.Harsha what should we make of the meagre information? That Mr.Pitipana is learned in the law and could cook? Is that what is expected of an old Royalist buddy? Cook a report?

Let us get back to the world of bond trading. A basis point is a hundredth of a percentage point. To make it simpler, if a yield moves from 5.5% to 5%, it has moved 50 basis points.

Obviously Prime Minister Ranil Wickremesinghe thinks that the average quantum of gray matter which serves to process information in the brain of the average Gamarala’ in Sri Lanka is far less than one basis point! But ‘Gamaralas’ are beginning to run out of patience. Moving from bad governance to good governance the ‘Gamaralas are now experiencing a spell of ugly governance. Indeed very ugly governance at that.

It would be grossly unfair to accuse Governor Mahendran of withholding any information pertaining to his son in law. Sri Lanka is a small country. The incestuous world of the money market knew about the two Arjunas. Ranil Wickremesinghe decided to play Sri Krishna and persuaded the elder Arjuna to battle in the harsh world of greed.

Arjuna Mahendran is only a man. Power is not of a man. Wright Mills the author of ‘Sociological Imagination’ the seminal study of twentieth century society identifies five problems we face today in a free market economy; alienation, moral insensibility, threat to the spirit of democracy, disregard to human freedom and most significantly the conflict between bureaucratic rationality and human reason.

The problems such the one that is discussed are commonplace.

“Wealth does not center in the person of the wealthy. Celebrity is not inherent in any personality. To be celebrated, to be wealthy, and to have power requires access to major institutions.” What is nauseating with the governance style of the Prime Minister is that he reminds us of the commandant of Auschwitz who insisted “I never got complaints!”

Sri Lanka bond market insider dealing allegations to be probed: Ministers

COLOMBO (EconomyNext) - Alleged insider dealing in Sri Lanka government securities markets by a firm connected to the family of Sri Lanka Central Bank Governor will be probed, government ministers said.

"We have faith in the governor of the central bank," Deputy Economic Policy Minister Harsha De Silva said responding to questions at a Sri Lanka Law Conference whether alleged insider deals in gilt markets would be probed.

"We expect the governor to make sure that he carries out an appropriate investigation into whatever the incidents that people say have taken place."

There has been rising concerns in bond markets over controversial deals made over the past week by Perpetual Treasuries, a firm connected to Arjun Aloysius, the son-in-law of Governor Arjuna Mahendran.

Deputy Minister De Silva said the matter had already been discussed with Prime Minister Ranil Wickramasinghe and the Governor. The Prime Minister is the Cabinet minister in charge the Economic Policy Ministry under which the Central Bank falls.

"So we are quite open and transparent, because we do not want to have any negative impact on the markets by various rumours," the Deputy Minister said.

"We will make a statement in parliament or deal with in it in a more appropriate way."

De Silva said an inquiry had already taken place and he had seen the fact sheets.

Concerns

Many market participants do not believe that Governor Mahendran deliberately leaked information to create a situation which would undermine his own credibility and give rise to a political bombshell for the new administration, but the possibility of such events occurring had been raised earlier.

There had been objections to Mahendran's appointment originally due to the relationship with Perpetual Capital group and concerns have been raised by members of the public and others that problems could crop up, despite a recent resignation of his son-in-law from the firm.

Perpetual Capital group had been involved in controversial stock market deals with the Employees Provident Fund which have been questioned before.

Cabinet spokesman, Health Minister Rajitha Senaratne told reporters after the weekly news briefing that any allegations over bond dealing would "definitely" be probed and he had also raised concerns over earlier controversial deals.

"Because I have cautioned the government before his appointment," Minister Senaratne said. "The Prime Minister gave an assurance that if there are any allegations we will investigate and take necessary action."

Under the previous administration, no probes have been conducted over serious allegations of securities fraud.

The controversial deals involve two separate sets of transactions where profits of hundreds of millions of rupees are alleged to have been made in a matter of hours or days.

Secondary Market

One set of deals involve the sale of mostly 7-year bonds one week forward in the secondary market shortly before the Central Bank said Friday it was closing a 5.0 percent window where excess cash was deposited from March 02.

The previous administration had made a back-door 150 basis point policy rate cut by starting the 5.0 percent window and limiting access to its standard 6.50 percent window to three days a month in a September 2014 decision, which lowered overnight rates below 6.5 percent for most of the month.

The closure of the 5.0 percent window tightened monetary policy and pushed overnight interest rates above 6.5 percent. It is not clear why the move was not announced on Tuesday with the regular monetary policy statement.

Governor Mahendran said the removal of the 5.0 percent window brought Sri Lanka back to international practice and a visiting International Monetary Fund mission had raised the issue and the anomaly was corrected Friday.

When interest rates rise the price of bonds fall, generating a loss to their holders.

The longer the tenor of the bond, the bigger the loss to the holder and greater the profits to the seller.

Market participants say Perpetual Treasuries sold bonds mostly on Thursday before bond prices fell.

The allegation is that the firm aggressively engaged in these trades, including selling bonds forward that it did not have, to 'short the market' because it had prior knowledge that interest rates would go up on Friday.

A series of one week forward sales of 7-year bonds were also made at prices ranging from 7.95 percent to 8.05 percent on Thursday, dealers say.

Short selling is technically not allowed in Sri Lanka, under central bank guidelines where forward trades are expected to be made with bonds actually in a seller's portfolio, though the practice is common in most markets.

On Tuesday after yields went up in the weekly Treasuries markets and bond markets became active again the firm bought back bonds at lower prices at yields around 8.80 percent and lower to cover its short, dealers believe.

The price rapidly fell to around 8.10 percent as it started to buy. Market participants estimate about 2.0 billion rupees of such deals may have been made.

The deals in the secondary market could also include the sale of at least one billion rupees of close to one year maturity at 6.50 percent to a large private bank when the weighted average one-year bill yield the previous week was 6.13 percent, market participants say.

One year average auction yields rose to 6.99 percent at Tuesday's auction.

Primary Market Shock

The second controversial transaction involves a 30-year primary Treasury bond auction held last Friday, where average yields moved up to 11.73 percent from the 9.30 to 9.60 levels bonds had been sold in off-auction placements.

At the last public auction in May 24, 2014 the weighted average yield was 11.75 percent.

Central Bank Governor Mahendran said the average yield moved to 11.73 percent which was around the same as the 11.75 percent at the last public auction held before the 5.0 percent window was introduced in September.

After offering only one billion rupees to the market, the Central Bank accepted bids of 10 billion rupees, 10 times the original offer. Compared to recent off-auction placement rates of 9.6 percent, the weighted average yield was up over 200 basis points.

Governor Mahendran said because there were 20 billion in bids, higher than expected, a higher volume was taken because the government had funding needs. There was no immediate comment from the firm.

The cut-off or the highest yield at which bids were accepted went up to at least 12.50 percent last Friday, market participants says. Dealers who submitted so-called 'dummy bids' at those levels were also allocated bonds.

The sudden spike in long bonds yields left the market shell-shocked and killed all activity for the entire day Monday till the end of the Treasuries auction on Tuesday.

It is alleged that Perpetual Treasuries bought at least 3 billion rupees worth 30-year bonds at 12.5 percent, funding the purchase with money borrowed from a state bank through a buy-sell deal.

Markets participants say only an investigation would reveal the true extent to the deals made last week.

Soon after the 30-year auction, there were buyers at around 12.0 percent giving a firm that was allocated 3 billion rupees of bonds instant profits of 116 million rupees. A one percent drop would give profits of about 230 million rupees.

Volume Knowledge

Sri Lanka's central bank, which sells bonds on behalf of the Treasury, has had a habit of accepting higher amounts than the offered volume which is originally communicated to the market.

In international bond sales by Sri Lanka and even in the domestic listed debenture sales, sellers usually communicate the volume and sometimes say an additional tranche will be taken if the first volume is oversubscribed.

They say accepting higher volumes - especially many times the original offer - mis-directs the market and breaks the terms of the original offer-acceptance principles of contracting and it amounts to a shifting of goalposts.

It also leaves room for insiders to profit when other market participants do not have equal knowledge of the actual borrowing requirement, they say. The biggest losers would be genuine buyers of long term bonds such as insurance and pension funds.

To eliminate the possibility of insider knowledge and make markets function better, the actual borrowing requirements perhaps with a 'green shoe' option for an extra volume, could be communicated, market participants say.

Though small increases may not matter, big increases, especially in illiquid long bonds can have severe repercussions, such as killing all market activity for several days or leading to the demand for much higher yields in subsequent auctions as happened last week.

It may take weeks for the market to recover fully from such shocks and rates to stabilize, though analysts agree that market interest rates have to move up especially to keep the exchange rate stable, with the additional spending outlined in a revised budget in January.

INTERVIEW-Sri Lanka waiting for opportune time to raise up to $1.5 bln bond

From 

* Aims for up to 30-year tenure for sovereign bond this year

* Will use bond proceeds to roll over 2015 debts

* Reserves on the rise after sharp fall in January

* Cut in interest rates possible if inflation falls

By Shihar Aneez

COLOMBO, March 3 (Reuters) - Sri Lanka is waiting for the right time to launch a sovereign bond of up to $1.5 billion, possibly with a longer tenure to roll over its debts in 2015, Central Bank Governor Arjuna Mahendran said on Tuesday.

The island nation's last sovereign bond of $500 million was priced at a yield of 5.125 percent in April 2014.

"Now that inflation is coming down, I see no reason why we won't get a better rate of interest," Mahendran told Reuters.

Sri Lanka's inflation hit a record low of 0.6 percent in January, slowing from 3.2 percent the previous month after the new government reduced fuel prices.

Speculation over an interest rate hike by the U.S. Federal Reserve and Greece possibly exiting the euro zone have been weighing on emerging markets' bond pricing at the moment, Mahendran said.

"So we want to wait for an opportune moment. When that volatility decreases then we will be able to get the best possible rate for our borrowing," he said.

"I will definitely go for a longer tenure, may be even a 20-year or 30-year is something to look for. We don't want to increase the interest rate burden of the country."

The bond will be used to roll over some expensive debts that have to be repaid this year, he said.

Mahendran said the lead managers for the bond issue have been picked, but declined to name them.

The central bank repaid a $500 million sovereign bond from its reserves soon after the Jan. 8 presidential polls as the $76 billion economy was unable to raise money through sovereign bonds due to the election.

However, that along with some other debt repayments depleted the country's foreign currency reserves by more than $1 billion in January alone, when it fell 13.2 percent to $6.28 billion.

That put pressure on the rupee currency resulting in a 1.2 percent fall against the dollar in January.

"Now that pressure is off because we don't have that kind of bunching up of repayments for most of the rest of the year," the central bank governor said.

"So we are not expecting the currency to be under pressure. In fact, in the last few weeks, we have seen our reserves increasing. We have over $7 billion, which is enough to cover over 4.5 months of imports."

He said allowing the rupee to float freely could cause a lot of volatility because the currency market is a "very thin market" and small trading volume could create volatility.

Sri Lanka's policy rates have been held at a record low since January 2014 and the central bank removed a lower penalty rate of 5 percent with effect from Monday, which Mahendran said was to eliminate interest rate volatility in the call money market.

The central bank in September imposed the penalty rate to discourage commercial banks parking their money in the central bank and that encouraged lending at a lower rate to boost private sector credit growth.

"I am expecting if inflation falls towards the middle of the year, then we will be able to start reducing interest rates further." (Editing by Jacqueline Wong)

Sri Lanka integrated resort should tap bond markets: CB Governor

COLOMBO (EconomyNext) - A large 'casino-related' project has been asked to tap Sri Lanka's bond markets instead of relying on more bank financing, Central Bank Governor Arjuna Mahendran said.

He said a bank had requested for its single borrower limit to be lifted so that it could fund such a resort.

"So I said no," Mahendran told a business forum in Colombo organized by Fitch Ratings. "It is ridiculous, we have a bond market here.

"We have blue chip companies who are going to banks for their funding needs when there is a bond market and they can easily tap these markets for their liquidity.

"So I think there is a big education process ahead for us on the benefits of funding from the markets. Obviously it is cheaper, it is more reliable and you know it creates liquidity. Obviously some of our corporate titans have not learned the lessons yet."

Commercial Bank Chairman Dharma Dheerasinghe said his bank was lending to prime customers at rates as low as 6.5 percent.

Analysts say it is not clear whether projects that borrow at such rates would be viable when interest rates eventually normalize with bad fiscal policy (Sri Lanka in danger of travelling the PIGS path with low nominal interest rates).

Sri Lanka's market interest rates are at a historic low, with Treasuries going at yields not seen since the 1970s.

Sri Lanka's banking system is recovering from a balance of payments crisis triggered by bank financed energy subsidies which were ultimately accommodated by Central Bank credit in 2012 delaying a required interest rate rise.

Corrective measures in 2012 left the currency depreciated from 110 to 130 to the delay, decimating domestic purchasing power, eventually leading to the ouster of the last regime while high rates forced firms to de-leverage and there was also mass-default of gold-backed loans.

But private credit demand had started to pick up from August 2014 as the cycle progressed.

But due to a policy error in failing to sterilizing excess liquidity effectively, Sri Lanka's rupee has come under pressure again the forex reserves are under pressure, partly due to IMF repayments as warned by analysts. (Sri Lanka may lose forex reserve beauty contest amid ultra-low interest rates)

Sri Lanka's current interest rates are considered to be unsustainable by many analysts especially after a revised budget raised state sector salaries, cut fuel prices and delayed a 1.5 billion US dollar bond issue scheduled for January.

There has also been a boom in listed corporate bonds, largely because they are tax free, which itself raises the danger that people may buy the bonds without paying proper regard to the credit risk.

But many of the bonds, especially those with higher ratings, have been bought by banks.

Head of Sri Lanka's Fitch Ratings Maninda Wickramasinghe warned that there was a danger of credit being mis-priced if risks were not properly communicated to market participants.

Sri Lanka to confirm Mahendran as central bank governor soon

COLOMBO (EconomyNext) - The appointment of Arjuna Mahendran as the governor of the Central Bank of Sri Lanka will be confirmed within the next few days, deputy minister of planning Harsha De Silva said.

Mahendran last week visited the Central Bank and had discussions with top officials there.

Former governor Ajith Nivard Cabraal held the post for nine years and resigned after Mahinda Rajapaksa lost his presidential bid for an unprecedented third term in the January 8 poll.

Cabraal's critics claim that the central bank was heavily politicized under his watch and spent large sums of money on activities outside the scope of the central bank.

New president Maithripala Sirisena's administration has vowed to correct data of the central bank that some believe to be suspect.

Sri Lanka names international banker Mahendran as central bank chief

Jan 15 (Reuters) COLOMBO Thu Jan 15, 2015 5:55pm IST

 Sri Lanka's newly elected leader, Maithripala Sirisena, appointed international banker Arjuna Mahendran as head of the central bank, with immediate effect, the government said on Thursday.

Mahendran, an Oxford-educated graduate, has nearly 30 years of experience in the financial services industry across Asia, serving in both private companies and public sector bodies.

He holds an MA in Philosophy, Politics, and Economics from Oxford and his most recent position was chief investment officer at Dubai-based Emirates NBD's wealth management arm.

Mahendran was the former head of the island nation's state-run Board of Investment under the government headed by current Prime Minister Ranil Wickremesinghe between 2001 and 2004.

The veteran banker was the managing director of HSBC in Asia from 2008 to 2013 before moving to Emirates NBD Wealth Management. He has also worked at international lender Credit Suisse.

Former Central Bank Governor Ajith Nivard Cabraal, a political appointee since 2006, resigned on Friday after Rajapaksa lost his bid to be re-elected president for a third term.

Under Cabraal, Sri Lanka achieved annual average growth of 6.8 percent for an economy now worth $76 billion a year, and inflation held in single digits for more than 70 straight months.

Some independent economists and opposition politicians, however, say some macroeconomic data have been massaged in recent years to present a rosier picture, attract investors and get lower rates on foreign loans. Cabraal rejected those claims.

Sirisena's coalition government, headed by the pro-business United National Party, has said it will audit the economic numbers before deciding on economic policies. (Reporting by Shihar Aneez; Editing by Clarence Fernandez)

Arjuna Mahendran in Sri Lanka to accept the post of Governor of CBSL

It is being reported that Arjuna Mahendran has arrived in Sri Lanka to accept the post of Governor of CBSL despite earlier reports that he is unable to accept the post immediately due to existing contractual commitments. Talk in financial circles was that Mr Dinesh Weerakkody would be appointed in the interim as Mr Arjuna Mahendran would not be immediately available.

Mr Mahendran with over 30 years of experience in the Asian & International banking sector is presently attached to Emirates NBD Bank PJSC as  Chief Investment Officer of the Wealth Management Division.

He has a Master of Arts in Philosophy, Politics, and Economics from the University of Oxford.

Arjuna Mahendran new Treasury Secretary

Economist and investment expert Arjuna Mahendran has been appointed as the new Secretary to the Treasury, sources said. Mahendran had served as Chief of the Board of Investment (BOI) during the government of Chandrika Kumaratunga earlier. He had worked as the Managing Direct of the HSBC (2009-2013) and was working as Chief Investment Officer for Emirates NDB bank before he was appointed as the Treasury Secretary by the new government. (The Daily Mirror)

C/V - Background of Arjuna Mahendran according to Bloomer Investment Week.

Mr. Arjuna Mahendran serves as Chief Investment Officer of the Wealth Management Division at Emirates NBD Bank PJSC. Mr. Mahendran has nearly 30 years of extensive experience in the financial services industry across Asia. He served as Chief Economist & Strategist - Asia Pacific at Credit Suisse Group AG and was its Head of Research for Asia Pacific since October 2006. He assisted the Wealth Management division to continue to grow from strength to strength. He served as the Managing Director; Chief Investment Strategist - Asia and Singapore and Head of Investment Strategy – Asia at HSBC Private Bank. He was responsible for driving research and providing in-depth analysis of markets in the Asia Pacific. Mr. Mahendran also led the analytics team in interpreting market economics and developing investment strategies for HSBC's clients in the region. He served as Chief Economist-Strategist, Asia Pacific at Credit Suisse Private Bank. Mr. Mahendran served as the Director and Head of Economic Research (ASEAN and South Asia) at Societe Generale Cross Asset Research. Mr. Mahendran has an experience of over 26 years in both private companies and public sector organisations, including senior positions with the Central Bank and Ministry of Finance of Sri Lanka as well as the World Bank. He led an award-winning team of research analysts and economists in covering stock market ass set allocations, providing economic intelligence and forecasts as well as in-depth analysis of countries in the ASEAN region and the Indian sub-continent. Mr. Mahendran also regularly presented to institutional fund managers in the United States, Asia and Europe. As the Chairman/Director-General for the Board of Investments of Sri Lanka, he was responsible for attracting and facilitating inflows of foreign direct investments to Sri Lanka. For Mr. Mahendran's instrumental role in establishing the Board of Investments of Sri Lanka and driving its strategy, he was named a runner-up in Euromoney Strategic Direct Investor’s “CEO Lifetime Achievement Award” in 2003. He holds a Master of Arts in Philosophy, Politics, and Economics from the University of Oxford.