By David J. John
For those new to the format of this program, as part of the process of writing this annual story, Joe Arnett of Deloitte, Maureen Maratita of Guam Business Magazine and I meet with many of the top businesses written about within this publication to discuss the economic trends of their company, their industry and Guam and the islands.
Each year a clear economic pattern forms from the discussions of these meetings. As we conducted our meetings for this year’s report it wouldn’t take Nostradamus to predict that military and federal expenditures to the island reached record number in 2020-2021 and that tourism was flatlined.
Federal spending to include COVID pandemic programs in excess of $1 billion and In fiscal 2020 the Department of Defense spending of $365.1 million on Marine Corps related projects in fiscal 2020, according to the interagency Coordination Group of Inspectors General for Guam Realignment Annual Report helped keep the island afloat. If you include the usual federal spending on salaries, military construction (non-Camp Blaz) and benefit programs, the island received in the ballpark of $3 billion in federal spending. Please note, numbers for federal spending on purposely vague as depending on who we spoke with the numbers seemed to change.
The Guam port saw an increase in port visits and exercises not only from our forces and our allies in the region, but even one of the Queen’s aircraft carriers. The HMS Queen Elizabeth visited the island twice in about a month to undergo some scheduled maintenance, as well as to provide for some R&R, as other ports in the region have shut down accepting foreign vessels to their ports.
As in the continental United States, various factors are causing supply chain disruptions and shipping delays, as well as creating inflationary pressure for basic input costs — to include chips, rebar and aluminum — as well as on retail prices such as food and gasoline to levels not seen since the 1970s to 1980’s in western economies. Regarding shipping, several leaders we spoke with cited the global supply chain for empty shelves and delays in parts for their projects, but everyone we spoke with complimented Matson for their segment of trade, citing consistent and uninterrupted ship traffic to the island.
Many experts, including most members of the Federal Reserve Board, believe inflation is transitory and supply chain issues should work themselves out over the next few quarters, resulting in some future inflationary pressures subsiding. However, the price of crude (as well as gasoline at the pump) will most likely remain high for a number of macroeconomic reasons. The problem is once inflation is baked into an economy, the prices of goods, services and labor rarely if ever reduce. With this, even if inflation normalizes four to six quarters from now — which I personally question will happen due to certain inflationary supply side policies of the current administration in DC — the inflation that occurred in the two plus year period will remain in the economy. As we will be attempting to revive our tourism economy from a virtual flat line, we are going to have a difficult time passing these increased costs on to our arriving guests, albeit I don’t think we will have much choice.
As for the price of crude and gasoline, the region’s economy is not involved in the extraction or refining of fuel. With this, increased prices serve nothing more than a hidden tax on our economy taking precious dollars out or our economy and into the producers’ hands. On a side note, please don’t blame our local gasoline suppliers for this. When the price of a barrel of oil goes up (the input), their costs go up right along with it.
As bad as COVID has been for the local economy, it could have been significantly worse had it not been for the combination of federal programs such as PUA, EIP, PPP, RRF and the Shuttered Venue Program; as well as the local government programs such as All Rise, GEDA business grants 1 & 2, and the GEDA rental assistance program. Not only was Gov. Lou Leon Guerrero’s administration the first state or territory to provide aid to business, but, if you add up the stimulus of the existing local business grants along with the recently announced GEDA Local Employer Assistance Program, the territory ranks in the top five states/territories on a GDP basis in the country for local business grants. Please note that the LEAP program has a proposed $50 million cap; $25 million was pledged by the legislature and a $25 million match was offered by the administration.
These programs created pockets of surplus funds in the local economy driving auto and non-discretionary spending — at least early on in the pandemic, while leaving banks with a hangover of surplus deposits. The good news from the excess deposits was that as bad as things have gotten for some businesses and families, the delinquency rates at the banks we spoke with remain at historically low levels.
While many businesses have closed shop without a forecast of reopening, many more have turned lemons into lemonade and harnessed the true essence of entrepreneurialism. We saw many sit-down restaurants convert to take-out and patio dining almost overnight. A tour operator and a communication company began selling air purifiers. A car dealership was selling boats. A tailor began selling PPPs. A wholesaler company began selling boat trailers. As well, the banks we spoke with said they saw a large uptick in new business accounts focused on home-based business and internet enterprises. In the spirit of Sun-Tzu, “In the midst of chaos, there is also opportunity.”
What concerns me most is the disconnect between Guam’s economy and the rest of the United States. CONUS’s economy, for the most part, is rebounding with a labor shortage in many industries. With this, there is limited desire to continue the federal programs that have kept Guam’s economy afloat up until this point in time — especially PUA-type grants for individual households. If tourism does not start to come back within the next couple of months, we could be looking at a potential brain drain of our labor force not seen since the early out government of Guam retirement strategies of the 1990s. Worse, if it gets to that point, the workers who will be leaving the island in search of jobs will be those with the best skills leaving a further void in our labor force when the economy normalizes.
One thing I think many have learned is that while tourism is a great industry and has been good to the island for 50 years, when events such as COVID, SARS, MERS, conflicts involving our military and natural disasters on the island occur, tourism is the first to suffer. With this, many on the island, including this author, believe we need to diversify our economy beyond tourism and military spending to create a more diversified economic base that can better withstand negative macroeconomic and regional events. To this end, the administration and the Guam Chamber of Commerce have joined forces to create a Diversification Taskforce.
There have been numerus efforts to diversify Guam’s economy in the last 30 years. What makes this one different and gives me optimism to its success is that the government and business are joining together and there is money budgeted to support the effort. The taskforce is co-chaired by Siska Hutapea, Christine Baleto and Joe Cruz of the Chamber of Commerce. Under the program, there are twelve potential diversification opportunities being looked at to include Agriculture/Aquaculture, Circular Economy, Construction and Labor, Pharmaceutical Manufacturing, Ship Repair, Silicon Village, Satellite/Space Launch, Captive Insurance, Relocation of High Wealth Businesses and Individuals, Alternative Dispute Resolution, Guam Trust Initiatives and Safe Haven Ports. Each initiative is teamed with individuals from the appropriate government agency and private sector. GEDA was budgeted approximately $3 million from the governor’s office for the initial costs.
Not all of these initiatives will pan out. If fact most won’t. However, some already have traction such as the Satellite/Space Launch initiative where the Guam International Airport Authority is working with Virgin Orbit to become a space port for satellite launching from the airport. It is anticipated that the Space Port designation will be approved within the next few quarters.
The demand for ship yard visits, to include the recently damaged nuclear submarine, the USS Connecticut, has shone a new light on the need for Guam to increase the port’s capabilities not seen since the closure of the Guam Naval Ship Repair Facility in September 1977. The committee and the administration are actively talking about initiatives to increase the capabilities to the port’s ship yard to include exploring how industrial 3D printing could help streamline parts supplies.
The telecommunication/Silicon Village initiative continues to see demand for undersea telecommunication cables landing on Guam. Currently, there are 11 operational cables on island with three more cables scheduled to arrive in the next 36 months. The cables provide more connectivity for the island community and businesses, as well as the opportunity for data centers in Guam. If successful, data centers lead to additional IT opportunities to develop on- island, resulting in higher paying tech jobs.
In regards to tourism, we heard many different predictions on when tourism will return to the island. The common theme we heard by many was 2023 or 2024. While I think that number has some merit as to when we return to 2019 level travel (a record year), my sense is that is extremely pessimistic. One of the telecommunications executives we spoke with talked about a breakout session he attended on cellular roaming trends, which at first glance would seem like an odd analytic to monitor economic activity. However, if you think it through, roaming is an ideal instrument for measuring the movement of people – aka tourism. In the presentation, roaming across the globe tanked when COVID hit, which is expected. Since early 2021, roaming has rebounded to pre COVID level numbers in North American, South American, Latin America, Europe, the middle east and Africa. Guess which region hasn’t rebounded? You guessed it Asia. Why?
Most countries across the globe have restrictive travel policies. What is different about Asia? In addition to the memories of SARs and MERS, as well as the lower vaccination rates compared to most of the developed world, I think the biggest input to reduced travel in the region is restrictive policies for returning travelers. Most countries in Asia still require their citizens returning from abroad to quarantine in a government facility for ten-plus days at their own expense, including our major source markets of South Korea, Japan and Taiwan — which was a major Air V&V market. These policies pretty much kill any scalable demand for travel to Guam at this point in time.
The opportunity is that once our source markets open, there should be significant demand for travel within the region as every other region across the globe has demonstrated. If Guam can be healthy, ready and open when these markets open, I foresee significant and meaningful number of visitors to the island. Mind you, not 2019 numbers which I agree are most likely a couple of years away, but if we could get monthly numbers of half the 2019 trend in the first half of the 2022 calendar year, along with the Cope North exercise in February 2022 comprised of 2,200 personnel, the Valiant Shield exercise in June 2022 with 11,000 personnel as well as the continued military buildup spending, Guam could see the light at the end of the most negative event to hit the island since the end of WWII.
The key for a quick rebound is to make sure that we are monitoring our source markets through the Guam Visitors Bureau’s contacts to make sure that once our source markets lessen their quarantine restrictions on their returning citizens, we are fully open and ready to receive visitors. This will require our businesses to be open and our workers to be ready to come back to work which is one of the key drivers of the Governor’s recently announced Local Employer Assistance Program, which is focused on staffing patterns.
Additionally, we need to recognize that even as federal programs expire, we may be operating within a labor constrained economy, as the 2019 workforce will not be able (or in some cases be willing) to jump right back into the same level of productivity due to such things as child care issues, transportation, the need for retraining. As well, some will be scared or have health issues delaying their return.
To quote one of the hotel executives we spoke with, “The only constant in Guam is calamity.” It can’t be overstated that 2020 to 2021 has been a very difficult period for Guam’s economy, but as I write this article, I do believe we are near the bottom and if we stay united as an island as we have in past crisis we will survive and come out the other side stronger for it. With increasing vaccination rates in our core markets, the introduction of vaccination boosters and new COVID treatments, and increasing air capacity to Guam, we are advancing towards getting our economy back on track. But we must first make Guam safe and healthy. Do your part; get vaccinated and if you don’t, please take extra precautions.