By David J. John

David J. John
Chairman and managing director
ASC Trust LLC

If one used the island’s Gross Receipts Tax receipts over the last couple of years as the only measurement to judge how the economy is doing, one would be forgiven for thinking Guam’s economy was on fire.

GRT is a 5% Gross Receipts Tax paid by businesses on most transactions on the island, which grew from $296,518,767 in 2020 to $323,792,627 in 2022, a 9% increase. Additionally, the federal government has provided the local government more than $2 billion in funds to help keep the economy going since the start of COVID.  Between the two, the government of Guam’s finances are the best they have been in decades.

However, while GRT is up, the increase is not evenly weighted throughout the economy, with most of the GRT gains coming from military construction projects. The good news is military spending should stay elevated to approximately $2 billion a year for the next eight to 10 years, with that number most likely increasing with some of the additional projects being discussed in the region.

Looking at the broader metrics of the economy to encompass tourism, employment, and inflation, the view is a much different result. This is not to say I am not bullish on Guam. I believe we have some incredible opportunities coming to our shores which I will also discuss. Lastly, with such a turbulent market for retirement accounts, Maureen (Maratita, publisher of Guam Business Magazine) asked me to provide my top line views on where the markets are headed over the next couple of quarters. Let’s go over each of these topics.

While Europe and the Americas have seen tourism springboard back to life after covid restrictions were lifted, Guam’s two major source markets — Korea, and Japan — especially Japan, have just begun to return. The slow return of tourists is the result of these markets traditionally being very risk averse, domestic travel opportunities within Japan sponsored by the Japanese government and weak exchange rates. In March, the yen to dollar rate was at 115.  It went above 150 in October and is currently sitting around 138. Meanwhile, the won was at 1,192 in March, hitting a high of 1,429 in October and settling around 1,314 in recent trading, making Guam extremely expensive against other Asian destinations not tied to the dollar.

The exchange rate differential is mostly the result of the current U.S. Federal Reserve’s rate policy, because of inflationary pressures within the US. In an effort to bring inflation back to its target rate of 2%, the Fed has aggressively increased the Fed Fund rate. The Federal Reserve’s 75 basis points (.75%) federal fund increase at its November 2022 meeting marked a sixth consecutive rate hike and the fourth straight three-quarter point increase, pushing rates to a new high since 2008.  Meanwhile, the Japanese and Korean central banks have held their overnight rates steady to keep consumer spending going within their countries. These policies work against the exchange rates for these markets.

The positive news is inflation appears to be moderating within the United States. While the Fed will certainly continue to increase rates — if this trend holds, it should take pressure off the Fed to increase the fed fund rate by another 75 basis points in its December meeting, which is one of the driving factors as to why the yen to dollar and won to dollar exchange rates have come down in recent days. If the Fed can take the gas off the pedal, and if not stop increasing rates, at least increase at a more moderate rate until inflation is within their 2% target, we could see exchange rates with our source markets begin to normalize within the next two quarters, which would be a boost for Guam’s tourism industry leading into calendar 2023.

While there is not a lot Guam’s tourism industry can do to drive tourism traffic to our island when our two main source markets aren’t opening as fast as we would like, Guam’s tourism leaders should be working together with a cohesive plan led by the Guam Visitors Bureau, focused on filling seats and improving our product by cleaning up Tumon, renovating our hotels and making sure our optional tours and transportation are ready for the tourists as they return.

Instead, the industry is the most divided I have ever seen it, with GVB not even having active board meetings. With GVB’s leadership at odds with each other, the industry has become fractionalized, resulting in the creation of two new industry groups: the Guam Tourism and Travel association and the Guam Restaurant Collective being established to get things moving.

While it is great to see so many companies and individuals stepping up to help get tourism back at the forefront of our economy, it is imperative that Guam’s tourism leadership stop the internal bickering immediately and work as a single team, with a single plan, and a single message.  If the industry can pull together and leverage its collective resources with a single message to drive demand for seat capacity, Guam could see meaningful arrival numbers in the first quarter of 2023.  However, if the industry continues to operate in multiple silos, with multiple messages, and multiple objectives, with no leadership, an organic rebound of arrivals is more likely not to occur until the second half of 2023.  Many tourism operators are on their last legs.  Waiting another six months for meaningful traffic could be too long. Let’s hope that now that the election is over, GVB can get its act together and create Team Guam with a united message.

Back to the buildup.  The construction of the Marine Corps Base Camp Blaz is well on its way. If you have not seen the activity, and are on island, I suggest you drive up north and look for yourself. It is quite impressive. Additionally, both the Navy and the Air Force have extensive multi-year projects of their own. However, the big game changer coming to the region is within the U.S. Missile Defense Agency, with plans to replace the island’s current Theater High Altitude Air Defense or THAAD system with an Aegis Ballistic Missile Defense System with more capabilities against hypersonic missile threats at a cost of over a half a billion dollars by 2028.

It is safe to say, without military construction and the federal funds GovGuam received during COVID, the region’s economy would be on life support. However, while the military construction has been the driver of the economy, it is not without its issues. The demand for construction on base has absorbed most of Guam’s construction capabilities, leaving inadequate capacity outside the fence. The lack of capacity has led to highly elevated construction costs and delays for local housing and commercial construction.  Siska Hutapea of Cornerstone Valuation Inc., recently reported that due to increased construction costs and mortgage rates (from 3.11% to 6.94%), the median price of a home on Guam has risen from $334,000 to $425,000 over the last two years, resulting in monthly payments on a median Guam home rising from $1,426 in 2020 to $2,810 over the same period, all but making the dream of home ownership only a dream for many working families.

I am a strong supporter of the mission of our troops and the defense of our country; however, we need to make sure that the buildup works for the local population of Guam. An increase in wages that increases less than inflation is not an increase in purchasing power. An economy only grows if purchasing power grows and the current housing trend is hurting a lot of families. Further, if we have a shortage of housing when we see an influx of workers and their dependents as the base comes online, Guam could be looking at civil unrest, which is not good for any stakeholder on Guam.

I wish I had the silver bullet to the construction problem, but this is a very complex issue, and it will not be resolved easily. I do know that the local government does not have the proper resources to fix this issue on its own and it will require a comprehensive strategy made up of the Government of Guam, the private sector, and the federal government.

While the return of tourism, inflation, and the lack of qualified labor is a concern to me, Guam has several generational opportunities that, if cultivated correctly, could transform our economy for years to come. Tourism is a great industry. It brings good jobs; it is light on the environment, and it creates a great lifestyle for the local population. I joke with my brother-in-law that we live in a giant resort. However, when COVID hit, and tourists stopped coming, it became apparent that we needed to further diversify our economy.  With this, Gov. Lou Leon Guerrero’s Economic Diversification Working Group — along with the Chamber of Commerce and the Guam Economic Development Authority — set out to look at other opportunities. And while some of what was looked at was already in motion on its own, the goal of the task force was to nurture the progress.

The initial industries discussed were alternative dispute resolution, captive insurance, Guam trusts, relocation of high wealth businesses and individuals from Asia, pharmaceutical manufacturing, construction and labor, ship repair, Guam as a Safe Haven port, silicon village, satellite launches, and aquaculture and agriculture. While I think any of these initiatives could still make a difference, two of them have the biggest upside to me — ship repair and the silicon village.

The military realized during COVID-19 when they couldn’t port their ships in many ports throughout Asia, that this issue could arise again, weakening their capabilities in the region. With this, they have pivoted and are looking at ways to control the narrative by increasing the capabilities of ship repair on Guam. They already announced additional capabilities be brought in through the Pearl Harbor Naval Shipyard and Intermediate Maintenance Facility, which is actively working with the private sector to boost our capabilities. Building these skills within the community will take time, but the upside of hundreds of highly paid skilled jobs is right around the corner.

One of the big issues of completing ship repairs in Guam is parts. Procuring parts for ship repair in a timely manner this far away from the mainland is a nightmare. With this, a group by the name of Astro America, in conjunction with the University of Guam and GEDA, is looking to fund opportunities in the advancement of component designs for large scale manufacturing.  What does this mean?  The group plans on putting very large 3D printers on Guam that can print parts for ships, airplanes, and other industrial needs. Not only will this cut down on supply chain issues, but it offers additional skilled jobs and shows the regions we are capable of high-end manufacturing, which could lead to other manufacturing opportunities.

After the 2011 tsunami in Japan, cable operators looked for other routes to connect CONUS to Asia. Guam was a natural fit. Fast forward to today and Guam is arguably one of the most connected communities in the world. The island currently hosts six cable landing stations, with an additional station ready to come online next year and planning for several more in various stages. While the landing stations provide speed of communication for the island, which helps business and makes communication and entertainment for accessible for our population, the real opportunities are in data centers, which if leveraged correctly will provide opportunities for technology companies to come to Guam to be near their data.

Turning to the markets, the stock market was brutal this year. After completely missing the inflationary numbers coming out of COVID-19, labelling it “transitory” and going on record that it would not last, the Fed reversed course in March of this year, recognizing that inflationary pressures had made it into wages and rents. Since March, the Fed has raised rates six times for a total of 375 basis points (3.75%) in an effort to slow consumer spending.

Most retirement plan accounts are made up of between 25% to50% bonds. Bonds have an inverse relationship to interest rates. When interest rates rise, bond prices usually fall, and vice-versa. As rates went up, along with the Fed’s messaging of future increases, bond prices got killed with the Barclays Aggregate Index down over 15% for the year (Remember bonds are the asset class that is supposed to reduce risk.).

Meanwhile, even with nearly full employment and strong demand for goods and services in the U.S., the market became concerned that the Fed would overcompensate for missing inflation out of the gate by increasing rates too long and too fast. The fear of the market throughout the year has been that a tight monetary policy will result in a hard landing and a recession. With this the markets sold off, resulting in the S&P 500 being down 15% year-to-date as of the writing of this article.

Longer term bonds, like the 20-year treasury, are down over 30% for the year, with an inverted U.S. Treasury Yield Curve. An inverted yield curve is when short term rates are higher than long-term rates. A yield curve inverts when long-term interest rates drop below short-term rates, indicating that investors are moving money away from short-term bonds and into long-term ones. This suggests that the market is becoming more pessimistic about the economic prospects for the near future. Since World War II every yield curve inversion has been followed by a recession in the following six to 18 months, and recessions are naturally correlated with decreased stock market return.

The good news for investors is the stock market is a leading economic indicator, meaning it prices based on future expectations — where the market is going, not what is happening in the immediate term. With this, the stock market is already pricing in Fed Fund increases well into 2023, inflation and a recession in 2023.

In the near term, the markets will be grappling with the anticipation of a recession and inflation won’t certainly be “transitory,” but as policy rates normalize, bonds will begin to look attractive. Projected equity returns should begin to rise, albeit in a rocky manner, and the 60/40 type retirement allocation should see several solid years starting in 2023, with returns annualized in the 6% to 8% range.

In summary, if Guam can get tourists back in early 2023, next year should be a good one with continued strong military construction demand and a rising stock market. And 2024 could see records in our overall economy. However, if we continue to infight and miss the mark on visitor arrivals, many businesses could fail, resulting in negative experiences for the tourist, circling back to less tourists coming to our island.