From the bond market to the stock market, they go

Friday, 23 October 2020 00:00 -     - {{hitsCtrl.values.hits}}

Sri Lanka’s undercapitalised market is dependent on foreign inflows for its buoyancy, a $ 5 million infusion (nearly one billion in rupees) is considered a successful day. It is so small, that to an outsider it may look like a toyland, with the different actors playing a mimic role. But even in toyland, there are winners and there are losers


To revive a flagging economy, central banks the world over often resort to interest rate cuts. As commonly held, low interest rates lead to increased borrowings which then lead to investment and the eventual revival of the economy. To the laymen, the esotericism of economic theory may make little sense, as that sweeping putdown by an amateur economist once had it, “Surely they do not know the difference between Treasury Bonds and James Bond!”

However, for the millions of souls whose daily reality is shaped by the vicissitudes of a stagnant third world economy, their endless hardships and the struggles for even the basics, life itself is an education, a university of hard knocks. There is no escape from the system, the more it changes, the more it remains the same. The people are only forlorn observers to an arrangement they evidently have neither the will nor the skill to alter. 

Periodically, with gaudy fanfare, the system installs a new elite, either elected or appointed. There is an appearance of a renewal; speeches are made, theories are promulgated, novel initiatives announced. Hope is rekindled, there is excitement in the country. But soon, the hot air blows away, we are again a struggling third world economy; the same people, the same problems.

In an election toss-up, one side will come face up, yet it remains the same low value coin; a country performing below par, notable only for its poor standards and low productivity. The show is presided over by a sham elite; their hypocrisy, the pretence of learning and the smugness, the mock competence, the perpetuation of the hold on power by their kith and kin, the personal enrichment, the unconscionable extravagances; the tired repetition of a sorry drama.

 

Patronage politics

Not so long ago, the then Prime Minister Ranil Wickremesinghe decided, apparently singlehandedly, on the suitability of Arjuna Mahendran, a long-time associate, to the post of Governor Central Bank. We can rightly say, the rest is history. It seems that the culture around him encouraged the Prime Minister to think of himself as something exceptional. 

Being a home-grown politician, Wickremesinghe did not see the bizarreness of patronage politics, in seniority being the main qualification for high office or the absurdity of claiming leadership as a family privilege. Some of the seniors, their mediocrity notwithstanding, are on every successive Cabinet. 

In the Sri Lankan way of seeing things, leadership is a matter of genes, domination by certain families has continued from 1948, even before. This malaise is not limited to politics, in many commercial entities we have sons succeeding their fathers, even in NGOs things are arranged in the family direction, it happened even in the rebel LTTE, Prabakaran’s son alighting on a leadership position in his early twenties. 

Wickremesinghe is of the system, and being a lifetime beneficiary of the country’s social backwardness, has no reason to change it. If change is forced on him by circumstances, he is bound to manoeuvre the leadership to a bloodline, confirming his party’s entrenched reactionary instinct!  When elected to high office, he wasn’t large enough to realise that the unbounded flattery of his courtiers was just trumpery, more about the abjectness of his court, than his leadership capabilities. Oriental obsequiousness degrades the supplicant, but also misleads the patron.

Today, the knowledge curve expands so rapidly that even for a dedicated professional his particular discipline is a lifetime engagement. On a given subject, a politician may listen to several experts before endeavouring to make a sound decision. He will be guided by his wisdom and political inclinations, considering the overall objectives. However, when the politician has read a book or two on the subject, or flattery has him believe that he himself is an expert, little knowledge can become dangerous.

 

The bond scam

Arjuna Mahendran has a son-in-law who is a large scale trader of sovereign bonds. According to the evidence led at subsequent inquiries, at the very first sale of bonds under the new Governor, the son-in-law was a major bidder, and obtained a giant share of the issue. 

The quantity of the issue was increased that very morning, which enabled the son in law, who had pre-arranged bank funding, to obtain more bonds. The Central Bank interest rates were changed for this particular issue. There were many such extraordinary happenings in relation to this, and subsequent bond issues which space and time does not permit analysis here.

Despite a consorted effort to play down the twisted swindle, the story soon went public and Ranil Wickremesinghe was compelled to lead the UNP on a determined rear-guard action, including appointing a so-called commission of inquiry led by a few lawyers of his own party! This childish effort to gloss over a serious offence involving the party leadership brought some hilarity to a dark episode, but certainly lost the Government much good will. 

At the Leader’s behest, party spokesmen fired salvos at the former Governor Ajith Nivard Cabraal, alleging that similar things happened during his tenure as well, a defence that could only underline the dubiousness of the country’s Central Bank! But, what did Wickremesinghe do to restore the Central Bank’s dented credibility? He recommended an extension of Mahendran’s tenure!  

Ultimately, the sitting parliament and the government of the day are responsible for the handling of public funds and the integrity of public accounts. Five years later, at the General Elections of August 2020, the people gave their verdict and it was unforgiving. In an inevitable result, the voters decided that the once-mighty UNP had lost the right to represent them in Parliament, and denied even a single seat to the party, perhaps closing a chapter of our political history. 

 

A tangled web

Many of the inquiries that followed the bond scam concentrated on the hard facts, documents and other verifiable matters. This is only natural, legal investigations do not usually venture into matters which are essentially notional, if not backed with hard evidence. Those committing well planned scams do not oblige us with documentation of their evil schemes, unless the document itself is essential for the committing of the offence. Therefore, much of the story remains undocumented and untold, we can only surmise what may have happened.  

The shadowy associations, passing of rich gifts, under the table political funding, favours shown and such like, remain outside of the scope of a general inquiry. But it is there. The unseemly connections between politicians, administrators and men of business are often alluded to, but never explored fully. These networks lead to a tangled web of conflicting interests, beneficial relationships and compromised positions. 

When duplicitous men get into positions of power, sovereign bonds are not the only way in which they may enrich themselves. Their fertile minds can think of endless ways of milking the system and invent devious stratagems not easily unravelled. Our investigative machinery not only lacks the motivation to take on complex white collar crimes, they also are woefully inadequate in the necessary sophistication to undertake the multi-disciplinary approach called for. Matters are further compounded when the trail points to the highest in the land, the investigators are inhibited by their culture, as well as the political system. 

 

Colombo stock market

Several economic managers of the present Government are openly talking up the prospects of the Colombo stock market, encouraging local investors to move their savings to stocks. They point to the current low interest regime as a compelling reason to consider the stock market as an alternative investment.

This is unusual, rarely do governments promote stock market investments for the general public as policy. They may take steps to develop and widen, make more transparent the market, but will not openly encourage retail investments into what is essentially uncertain, if not, speculative. While there are several examples of huge gains for savvy investors, the legendary Warren Buffett being an exceptional success in the art of stock picking, it is a fact that many small investors have got their fingers burned in the essential volatility of share price movements. In a crisis ridden country, a rising stock market, cries manipulation. A healthy market should rise in tandem with improving economic performance.

Nearly all the available market models and the literature on the subject, are based on developed markets like the US and Europe. Warren Buffett has succeeded in a gargantuan stock exchange, carrying thousands of listed companies, trading billions of dollars’ worth stocks on a daily basis.  Even in the several trillion dollar US stock market, authorities often attempt to cool down the temperature with warnings of “irrational exuberance”, discouraging the   investors from chasing windfall profits without heed. 

America may command the largest economy in the world, but its stock market is not immune to regular “corrections” and long periods of bear markets, meaning, the prices do not move up or actually keep going down.  And, these are well regulated, minutely studied markets with thousands of highly qualified professionals working on every aspect of the trading.

In a miniscule market, a few big fish in a small pond; open to manipulation, rife with insider dealings, doubtful accounting standards, the vulnerability of the small investor is infinitely higher. Markets move for complex reasons, and are sensitive to various factors. It is not a question of merely buying a share; an investor must know the share, know when to buy and when to sell. Clever stock picking is generally not within the area of competence of a small investor.

 

Market manipulation

Sri Lanka’s undercapitalised market is dependent on foreign inflows for its buoyancy, a $ 5 million infusion (nearly one billion in rupees) is considered a successful day. It is so small, that to an outsider it may look like a toyland, with the different actors playing a mimic role. But even in toyland, there are winners and there are losers.

Our small investors cannot really afford speculative investments. What is euphemistically referred to as a stock market correction is a sharp drop of prices. An investor putting in his savings of Rs. 100,000 to the market may suddenly find that his nest egg has shrunk to Rs. 60,000 in a market correction. It will take time for the stock to recover.

In the sovereign bond saga, the country paid a huge price for the laxity of the authorities with regard to conflict of interests’ situations, a concept ignored to our peril. No person should be making policy on a subject in which he has either monetary or other interests: whether direct or indirect. For most part, the concept of conflicting interests, is brushed over here; many decision makers in this country, both in the public sector as well as the private sector, have divided loyalties when performing their tasks. 

We can only hope that those who are urging the public to invest in stocks, by themselves, or their close associates, are not large-scale investors in the stock market. If that is the case, a financially-illiterate public rushing to the market with their savings may be unknowingly pumping it up, only to fall victim to the cunning operators in what is after all, an uncertain market. We could then be witnessing another manipulation by the combination of power and money, with only their own beneficial interests at heart.

 

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