central bank 2The Sri Lankan government appointed an ally of the new prime minister who previously worked as a wealth manager with HSBC Holdings Plc (HSBA) and Emirates NBD to run its central bank.

Arjuna Mahendran was today appointed by President Maithripala Sirisena, on the recommendation of Prime Minister Ranil Wickremesinghe, the president’s media office said Friday, Jan. 23 in an e-mailed statement. Mahendran succeeds Ajith Nivard Cabraal, who resigned a day after Mahinda Rajapaksa’s 10-year rule ended in Jan. 8 presidential elections.

The new governor faces the challenge of managing Sri Lanka’s largest debt repayment in a decade. Foreign borrowing more than doubled since the end of a civil war in 2009, underpinning a growth spurt that saw the island’s economy expand 7 percent a year on average.

“He has a rich combination of policy and banking experience,” Razeen Sally, an economics professor at the National University of Singapore, said of Mahendran. “His three decades in international banking will be useful given Sri Lanka’s foreign debt obligations.”

While Mahendran is capable, his ties to the island’s new leaders pose a risk, Adrian Perera, chief executive officer at Lanka Ratings Agency Ltd., said by phone. Cabraal’s tenure covered most of Rajapaksa’s rule, which was marked by allegations of corruption and patronage.

If President Maithripala Sirisena’s administration “starts a mudslinging campaign and gives negative reports about the economic status of the former regime, investors will have a negative view of the country and rating agencies will downgrade it,” Perera said.
Diverse Coalition

Mahendran headed Sri Lanka’s Board of Investment from 2002 to 2004 under Wickremesinghe, who was prime minister at that time. His United National Party now is the largest in a alliance headed by Sirisena that includes capitalists, Marxists, a hard-line Buddhist party and the island’s main Muslim and Tamil minority groupings.

The actions needed to keep this disparate coalition together until parliamentary elections to be held in April may bring instability to Sri Lanka, Standard & Poor’s said after the vote.

The new government will work with both regional giants India and China, Investment Promotion Minister Cabir Hashim said Jan. 16. Even so, he said it will review a $1.4 billion Chinese-funded project to build a city roughly the size of Monaco on reclaimed land in Colombo port, which would be Sri Lanka’s biggest foreign-funded investment on record.
Debt Repayments

During Cabraal’s tenure, China’s share of lending to the island nation rose sevenfold and interest costs surged to among the highest in countries rates by Moody’s.

An increased dependence on foreign borrowings endangers Sri Lanka’s economic security, Sirisena said in his election manifesto. His government will have to repay or rollover about $2 billion of debt in 2015, the most in data going back to 2005.

Mahendran was most recently chief investment officer at Emirates NBD (EMIRATES) Wealth Management and previously a managing director and chief investment strategist at HSBC Private Bank. A University of Oxford graduate, he’s also been an economist at Credit Suisse Private Bank and held senior positions with Sri Lanka’s central bank and finance ministry. (Bloomberg)

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