By David J. John
While we certainly have had our share of head fakes in the last 10 years, and one should always provide disclaimers when attempting to predict the future, the region’s economy appears to be showing signs of green shoots, leaving most business leaders we spoke with cautiously optimistic of where things are headed.
Tourism continues to be Guam’s number one industry generating upwards of $1.5 billion into the economy — the Gross Island Product is estimated to be $4.052 billion — creating 18,000 plus jobs, which represents one-third of all non-federal jobs on island, resulting in $150 million in tax revenue for the local government.
Guam saw arrivals hit 1,308,035 in 2013, a 2% increase over 2012 and a double-digit increase over 2011, putting 2013 in the top five all-time years of visitor arrivals for Guam. The increase occurred despite the global decline in outbound Japanese travel, demonstrating that the Guam Visitors Bureau’s commitment to diversification is paying off with arrivals from Korea up 34.4%, the People’s Republic of China up 25.6% and the Russian Federation up 100.1%.
Japan continues to be Guam’s number one market with 68% of total arrivals, with the Korean market making up a strong number two with arrivals representing 17%. Continued arrival growth out of Busan of around 20% is expected for 2014. The large growth in arrivals is the result of an increase in the number of flights from existing carriers, a shift to larger equipment on some existing flights and United Airlines set to re-enter the market.
The trend of increased seat capacity out of Korea is very important as outbound travel from Japan was down approximately 5.5% from 18 million to 17 million year-over-year from 2012 to 2013, and further decreases are expected in 2014. (The good news is Guam continues to capture approximately 5% of these travelers.)
Why the decrease? The predominate wisdom for the continued deterioration of guests from Japan is a combination of long-term demographic changes in Japan’s population (Japan’s population is aging) and short-term monetary policy of the government of Japan, resulting in a weakening of the yen compared to the U.S. dollar, making Guam more expensive. If this trend holds, then Guam is going to need to continue to diversify its arrival base just to hold visitor arrivals at our 1.3 million mark. However, there are two other explanations for the recent decreases that bode well for Guam.
First, the Japanese government announced it would increase its consumption tax from 5% to 8% in the second quarter of 2014 and again from 5% to 8% in the fourth quarter of 2015. The stepped increases are aimed at covering rising social welfare costs linked to Japan’s aging population and to reduce sovereign debt. If successful, this move will strengthen Japan’s economy, which should be good for Guam in the long-run. However, in 2013 to 2014 this move altered Japanese consumers purchasing behavior as consumers chose to purchase consumer durables before the tax went into effect, which left less money for travel. The good news is this change is temporary.
A more interesting explanation we learned when making our rounds requires in depth knowledge of the industry. During the last couple of years, Japan has seen many new tourism projects come on line, to include Tokyo Disney Land’s expansion. In 2013 to 2014 there has been a lot of domestic support for these projects, both by the developers and the government, resulting in more travel within the country by Japanese vacationers. However, the marketing efforts for these projects have begun to move outside the country in an effort to increase arrivals to Japan. If this holds, the thought is that Guam could see more arrivals from Japan in 2015.
With back-to-back strong years, the growth in arrival numbers has begun to move through the economy in the form of increased hiring and investment in both room inventory and tourism facilities. And the Guam Visitors Bureau has plans to continue this trend with its Vision 2020.
GVB’s plan calls for, “A world-class, first-tier resort destination of choice, offering a U.S. island paradise with stunning ocean vistas, for two million business and leisure visitors from across the region with accommodations and activities ranging from value to five-star luxury — all in a safe, clean, family-friendly environment set amidst a unique 4,000-year-old culture.”
The key to this plan is 1,600 new rooms and upgrades to Guam’s existing facilities by 2020. The process has already begun to take hold. Ken Corp., the largest hotelier in Guam by a long shot (the Sheraton, Hilton, Pacific Islands Club, Hyatt and Nikko hotels), has been undergoing an aggressive upgrade to its existing hotel inventory, starting in 2012 and continuing into 2014. Additionally, Ken Corp. recently announced plans for a new tower to be added to the Nikko property.
The latter is of particular interest. While Ken Corp. has made significant investment in Guam in the last 10 years, most of the purchases were at prices below replacement cost. This will be Ken Corp.’s first newly constructed property within its Micronesian inventory, which is bullish for Guam.
Ken Corp.’s upgrades are not alone in Tumon. The long-time Marriott has been rebranded to its original name of Pacific Star Resort. As part of the rebranding the hotel has begun an extensive renovation to the property. The renovations will be carried out in the next couple of years so the hotel can stay open during the renovation.
Lotte Hotel took a different approach when the chain took over the old Okura Hotel. Lotte temporarily closed the hotel while renovating and brought the rooms back on line in 2014. The result is a product Guam can be very proud of.
The Ysrael family is set to open The DusitThani in 2015. This 417-room property is billed as “the finest luxury resort on Tumon Bay beach.” In addition to providing the high-end rooms planned for in GVB’s Vision 2020, it will have Guam’s largest conference facility, which should bode well for MICE travel (the Meeting, Incentive, Conference, and Exhibition market).
However, in order to bring on a combined 1,600 new hotel room inventory by 2020 (without a China Visa Program), the island is going to have to aggressively market and entice investors to the island. To this point, GVB is working with the Guam Economic Development Authority to create a new Tax Qualifying Certificate program specifically written for hotel development. The new QC is designed to provide more benefits to the developer, while being measurable for Guam’s Treasury. The new QC program is being introduced at “Invest Guam: The Time Is Now” the Guam Economic Symposium held from Oct. 22 to Oct. 24.
While there still has not been any movement in the China visa waiver program, investment from Chinese companies has begun in the region regardless. In Guam the investments so far have more been posturing with raw land transactions, in the Northern Mariana Islands actual hotel plans are underway.
Casino gaming was recently approved on Saipan. Under the agreement, the law requires the bidder to build a $2 billion, 2,000-room fully integrated casino resort. Plans are pending. In the meantime, E-Land Inc. has been busy. E-Land will rebrand its 315-room Palms Resort, formerly the Nikko, to a Sheraton property, and continue to move forward on its 300-room Coral Ocean Point property. The group announced plans to add 300 rooms to its Pacific Islands Club Saipan. Further, DFS Saipan announced a 350-room hotel to be built across the street from its T Galleria in Western Garapan.
If this isn’t enough activity, the Inos Administration had been actively working to entice hotel development on large government tracts in San Antonio, just north of Pacific Islands Club and around Pau Pau Beach.
It appears Saipan’s economy bottomed out in 2013 and is on the rebound. The key now is labor. Where will the workers come for all this new development? The NMI is moving to solve this issue on two fronts. First, the U.S. Department of Labor extended the CW visa program for another five years. This will take the pressure off companies in the near term. However, eventually if the NMI is going to stand on its own and create a strong economy, it will need a trained local workforce. Many companies, such as the Hyatt, have recognized this and have begun programs to move their workforce to local hires. This will take time to transition, but the wheels look to be in motion.
While tourism continues to be the main driver of economic growth, the elephant in the room is still the military buildup. By now, the buildup should have been underway and Guam’s construction industry bursting at the seams from increased activity. The good news is that it appears the wait should soon be over.
The public comment period on the Draft Supplemental Environmental Impact Statement for the relocation of Marine forces from Okinawa to Guam and the CNMI is closed. The public release of the Final SEIS as well as the Record of Decision is anticipated to be issued in early 2015.
Once these reports are released, those we spoke with were confident that some of the Japanese funds should be released and projects should hit the design stage in short order. While this will not help the first half of 2015, the back end should start to see some progress, with 2016 looking to be the key for the start of the much anticipated buildup.
While the buildup looks to be significantly smaller and drawn out, this is a positive development for the economy. By stretching the timeline out, Guam’s current construction capacity should be able to handle the bulk of the projects without having to significantly artificially increase our long-term supply. This should lead to less import of labor, more partnering between large off island companies and local companies and less of a bubble when the buildup is complete.
Up until this point in time, the good news is that while local contractors have waited for the buildup, military construction not related to the buildup has been strong for Guam, with Guam receiving an ever-increasing percentage of the military’s Pacific Command’s construction budget.
In addition to spending on military projects, 2013 saw major projects outside the fence with the construction of the private hospital — the Guam Regional Medical Center, renovations to Guam Memorial Hospital, Hotel Occupancy Tax Bond or HOT Bond projects to include the new museum in Hagatna, major renovations to the old Okura hotel by Lotte, the construction of the DusitThani by the Ysrael family, multiple new affordable housing projects and GPA/GWA’s campus construction.
If the ROD frees up funds and buildup projects are cleared to start the latter half of 2015, local projects such as the Ordot dump closure, HOT Bond projects, Port Authority of Guam renovations, Phase I of Tiyan Parkway, GPA (which recently closed on $75 million of new bond funds) and the Guam International Airport Authority terminal and runway projects should keep the local contractors somewhat busy.
The concern is that if there is a delay between the ROD and the start of construction, these new local projects will not be enough to keep the local construction companies busy until the buildup starts. It certainly would not be ideal if local contractors needed to reduce their workforces in 2015 only to have to try and ramp them back up in 2016.
The other major federal decision affecting the island was the decision on the Guam Base Operations Support contract. The work to be performed includes management and administrative, port operations, ordinance, material management, facility management, facility investment, electrical, wastewater, support vehicles and environmental. The contract is a cost-plus-award-fee contract for base-operating support services and has a maximum dollar value of $532.3 million, making it one of the largest support contracts to be let by the military over the next five years. After a delay, the contract was finally awarded to the existing contractor DZSP 21 LLC on Sept. 12.
While I am sure the losing bidders would argue with me, I believe the news of the award to DZSP is very good news for the island as DZSP has been a strong community partner, supporting local organizations such as the University of Guam, hiring locally and contracting with local companies.
Auto and wholesale industries (bellwethers of economic growth) have performed well. Many of the island’s wholesalers have been increasing their product lines and markets to include neighboring islands. Auto sales have experienced record levels with double-digit year-over-year growth and the demand is coming from all major markets: individual sales, rental car fleets and corporate fleets.
Bank deposits are strong. However, the concern is that deposits are growing faster than capital, putting pressure on Federal Deposit Insurance Corp. reserve requirements for local banks. Some of the increased deposits result from Citibank pulling out of Guam and tax refunds, but also are due to increased hours by employment in the tourism industry, Hay Study raises for local government employees, as well as individuals and companies setting aside funds for future investments. The key to the growth is that it is not coming from one source.
While excess deposits can be an issue for banks, it is far better than the trend of increased loan defaults. This trend will only last so long before companies and individuals will begin to spend and take on more debt, which should further fuel economic growth.
Overall, real estate transactions are down. Not counting one-time sales, mostly in commercial property related to tourism and affordable housing, a rebound in the real estate market is not likely to happen until the ROD is made and buildup construction begins. Some of this has to do with over-investment when the buildup was first introduced, but here we are starting to see some green shoots also with the turnover of the four towers in Oka and increased window shopping by off-island investors in Tumon.
There are multiple issues out that could sidetrack the positive momentum the economy is starting to experience. Most issues come from external forces that are out of our control such as the crisis in Ukraine hurting arrivals from Russia, U.S. involvement in the Middle East leading to decreased arrivals from Japan and Korea, and regional economic concerns.
However, there are also internal issues that could sidetrack our economic growth, specifically the actions of our local politicians to make far-reaching economic policy decisions without studying the long-term consequences of their actions. In order for debt markets to lend money to our government and outside investors to make large investments, they need to be assured that the policies of our government are stable and their decision making process is logical.
This process has been called into question twice in the last six months. Earlier this year, the legislature proposed a 39.31% increase in the minimum wage from $7.25 to $10.10. While I don’t think most people would argue that it is healthy to steadily increase minimum wages to parallel inflation and that moderated increases can drive purchasing power within the economy if done correctly, a 30% increase in a low inflation environment (according to First Hawaiian Bank’s 2013-14 Economic Forecast, Guam’s inflation was at its lowest since 2009) is unheard of. In the end cooler heads prevailed, but the increase is still a 13.79% increase from $7.25 to $8.25, again without an economic study being conducted.
Further to this point, recently the legislature introduced a bill to move the government of Guam employees back into a defined benefit plan. For those readers who are not familiar with this issue, the government of Guam has a poor track record of managing DB schemes. It maintains a frozen plan that has not had a new member enter since 1995, yet the plan is $1.4 billion unfunded and is taking approximately 15% of all taxes currently paid to the local treasury to fund.
Proponents of the plan say we learned our lesson last time, this time will be different. They made these comments while introducing the funding and benefits.
Pay attention to these numbers.
The government of Guam acknowledges that the change to the DB Plan will create a new $100 million liability to the government, yet it believes the new plan can double the benefits of the existing DC members and will only require a 50% increase in funding. I am no brain surgeon, but the math does not line up. How on earth do you increase benefits by 100% and cover a new $100 million liability by increasing funding by 50%? Sounds exactly like the old system, and if passed, it could bankrupt the territory.
In summary, these are exciting times to be involved in the region. If trends continue to hold, the economy could start to experience significant growth and prosperity.
On behalf of ASC, I would like to thank Deloitte &Touche and Guam Business Magazine for once again partnering with us to sponsor the Top Companies in Micronesia report.