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Brazil royalty and tax collection

The collapse of Brazilian mining company Vale's tailing dam in Brumadinho, Minas Gerais, on 25 January, which caused significant devastation, including 300 deaths, is having a detrimental effect on Minas Gerais's public finances. The state, which is Brazil's main producer of iron ore, has fined the mining company and introduced health and safety regulations that have brought production to a halt. Additionally, judges ordered the freezing of USD3.5 billion belonging to Vale, while threatening to implement USD1 billon in fines to compensate the families affected by the disaster.

The National Mining Agency (Agência Nacional de Mineração: ANM) has ordered the decommissioning of all dams that have similar structures to the one that collapsed in Brumadinho. As a result, Vale has stopped production at 10 of its mines in the state. The Federation of Industries of Minas Gerais State (Federação das Indústrias do Estado de Minas Gerais: FIEMG) estimates that this will cause a 14% drop in iron ore production, or USD6.37 billion in revenue losses. The state of Minas Gerais will also stop receiving USD1 billion in taxes and expected direct and indirect job losses are estimated at 850,000.

Significance

Minas Gerais had already declared a state of financial emergency in early 2019 prior to the disaster and will experience a worsening of its fiscal crisis. A recent National Treasury study stated that civil servant salaries and pension payments alone take up 79% of the state's budget. According to FIEMG, the mining disaster will result in the state's GDP shrinking by 7.3% in 2019.

The impact will be worse for several municipalities, such as Nova Lima, São Gonçalo do Rio Abaixo, Catas Latas, and Belo Vale, where as much as 50% of revenue originates from mining royalties. Overall, the state will struggle to honor payments to service providers, while public works are likely to be delayed or cancelled. However, this could be mitigated if the ban on Vale's operations is lifted soon, or through extraordinary budget allocations from the Federal government, both of which seem very unlikely this year.