Fonterra takes earnings hit in Sri Lanka, operations continuing 'within limits'

Fonterra is continuing its operations in Sri Lanka within limits. Photo / NZ Herald

Fonterra said it was continuing operations "within manageable and specific credit limits" in Sri Lanka while the island state suffered a prolonged economic and political crisis.

Sri Lanka, a small but important market for Fonterra, weighed on its APAC (Asia Pacific) result over the third quarter, with APAC's normalised earnings before interest and tax falling by 43 per cent to $177 million.

APAC chief executive Judith Swales, in an emailed update to the Herald, said: "Economic challenges continue in Sri Lanka, and our focus remains on taking care of our people and their families.

"We are continuing operations within manageable and specific credit limits, and doing our best to make food nutrition available," Swales said.

In its third quarter update, issued in May, Fonterra said that while its Australian business and ingredients channel continued to perform well, this was more than offset by the "unprecedented economic challenges' in Sri Lanka, margin pressure from higher milk prices and other Covid-19-related challenges.

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"While historically a good business for us, the significant deterioration of economic conditions in Sri Lanka has seen the rapid devaluation of the Sri Lankan rupee against the US dollar," the co-op said then.

This meant it took more Sri Lankan rupee to pay for product purchased from New Zealand, which is sold in US dollars, and has resulted in an $81 million adverse revaluation of the Sri Lankan business payables owing to New Zealand.

"This has been reflected in our normalised EBIT, which may continue to vary as Sri Lanka's currency fluctuates," Fonterra said.

Over the weekend, Sri Lanka's authorities extended school closures due to fuel shortages.

Financial news service Bloomberg reported that worker remittances to Sri Lanka dropped to US$318m in June, down from the norm of around US$600m.

Expatriate remittances dropped to US$1.3 billion in the first half, down from US$2.8 billion in the first half of last year.

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Sri Lanka has suspended US$7 billion of loan repayments, and has US$51b in outstanding foreign debt.

Protesters have for the last month been demanding the resignation of president Gotabaya Rajapaksa, who they say has mismanaged the economy.

Sri Lanka faces shortages of fuel medicine, an annual inflation rate of over 50 per cent, and historically high debt levels.