By David J. John
We certainly have had some false starts with our economy over the last decade. By now we should be in the middle of the Marine Buildup with a population in excess of 200,000 people. While it is six years later than expected, the Record of Decision was finally signed in 2015, and more than $500 million in military spending should start to proceed over the coming year.
While the start of the Marine realignment is welcome news for the region, today’s economy is not a one-horse pony. In addition to the increased military spending, Guam’s tourism numbers are at record levels, telecommunication spending is on a tear and the auto dealers are seeing record sales numbers.
As we visit the participating Top Companies each year, we try to gauge where things are heading. Usually, we have to put disclaimers on our predictions as there are pockets of conflicting trends in the feedback we receive. This year was different. Everyone we spoke to was positive about the economy. Additionally, we developed a new highly sophisticated method of predicting future economic activity in our meetings: carpet.
Different economists use different gauges to predict economic activity. My former partner, Allen Pickens, used to count container chassis coming and going from the port along Marine Drive from his window on the seventh floor of the Bank of Guam building. Ramona Jones, chief operating officer of Jones & Guerrero Co. Inc., told me about the Latte Test. Under her premise, if the Latte at your favorite coffee shop is too perfect, the barista has been on the job too long due to a soft job market.
Guam’s new analytics is carpet sales. As the premise goes, if a business is investing in carpet, it is typically due to the fact that they are confident in their business model as there is a slew of capital projects that a company can invest in before buying new carpet. Sure there is the business that can go no longer without changing their carpet, but a trend this does not make.
You would not believe how many companies we spoke to recently that purchased, were in the process of putting down or were in the ordering stages for new carpets, and it was not exclusive to any one industry. Hotels, restaurants, financial organizations were all updating their facilities, and carpet was at the center. Move over nonfarm payroll data, here come the carpet metrics.
Construction
The Record of Decision was signed on Aug. 29 of this year for the long-anticipated relocation of Marine units from Okinawa to Guam. While “Buildup 2” is materially smaller than the original plan with a price tag of $8 billion over an extended timeframe of 13 years, it may result in stronger long-term gains for the local economy as more local companies should be at scale to handle more of the work load and a smaller project will result in less social economic impacts to the island with a decreased chance of a bubble economy on the back end.
Contracts should start to hit in fourth quarter 2015, with significant contracts being let out in the next 12 months. One source told us total military contracts could reach $800 million within the next 12 to 18 months.
Nonetheless, even without the buildup investment, military construction under the National Defense Authorization Act of 2015 came in at $162 million increasing to $266 million in 2016. This again is a significant increase and a sign to the construction industry that their time is just around the corner.
Private sector construction is not overly strong, but there are some green shoots out there, which is a welcome sign since the private sector has wrapped up its two largest projects, Guam Regional Medical Center and the Dusit Thani Guam Resort in Tumon. Guam has seen increased housing projects, and multiple large-scale hotel projects are set to break ground over the next year and a half, led by Ken Corp.’s new Nikko property tower and a $100-plus million investment to renovate the Ladera Tower in Mangilao from condos to hotel suites.
Government of Guam construction projects are mixed. Most of the Hotel Occupancy Tax (HOT Bond) projects to include the Guam Museum are set to be completed by year’s end. New projects are moving forward to include the Tumon flood project, the legislature building, the tear down of the old Department of Administration building and talk of new government offices in Hagåtña.
Federal road construction activity has scaled back from recent years due to the smaller Marine footprint and issues with the Federal Highway Trust Fund. This being said, there are some projects that should be let over the next year or so to include Potts Junction, numerous intersection projects, Tiyan Parkway II and Ypao Road. Additionally, the airport and sea port continue to make major infrastructure investments.
Telecommunication
The telecommunications industry is on a roll. In addition to Telekomunikasi Indonesia International Inc.’s agreement to acquire GTA, capital expenditure in the industry is exploding with the island being virtually rewired for fiber resulting in hundreds of jobs to put the fiber underground. However, while the project to bury the fiber has a finite life, the carriers we spoke with said they will continue to create many more well-paying jobs to maintain the new highly sophisticated fiber network.
Industry representatives told us that the appetite for bandwidth following the release of the iPhone 6 has blown all five-year projections out the window, and as the consumer switches to more data-sharing programs and behavior changes, such as watching shows on their phones, this trend will not be short-lived.
Saipan can expect its own upgrades.
Consumers, autos and banks
In the U.S. mainland, the consumer is at the center of pretty much all economic activity and measurement. In our region we tend to neglect the consumer and focus our attention on tourism numbers and federal spending. While it is still down the list in what we watch for, the average family’s finances seem to be getting stronger and might make 2015 the year of the consumer.
Stronger consumer finances are a direct result of multiple factors. First, Guam continues to add jobs at a steady pace of approximately 2% per year, with numbers set to exceed these increases in the second half of 2015 with the opening of the Dusit Thani (250 jobs), the Guam Regional Medical Center (up to 700 jobs), telecommunication jobs (200 plus) and the awarding of military construction projects sure to add significantly more.
In addition to new jobs being created, consumers have more money in their pockets from sources other than new jobs. First, the Calvo Administration continues its pledge to payout tax refunds in a timely manner, resulting in bursts of activity around the island. Second, minimum wage was increased by $1 to $8.25 per hour effective Jan. 1, 2015, while government of Guam employees have been receiving increases in pay going back to 2014. Lastly the gift that keeps on giving: Fuel prices continue to drop.
The price of gasoline is down approximately $1.50 per gallon from a year ago. The Guam Energy Office showed approximately five million gallons of fuel being sold monthly at the pump, not to include jet fuel and propane. Fuel prices are down about $1.50 per gallon year over year, resulting in an injection of approximately $7.5 million in additional spending activity in the economy monthly. In a $4 billion economy, the reduction in fuel prices over that last year resulted in approximately 2.5% more money circulating in the economy than there was a year ago, just in fuel sales. This is a huge primer to retail, restaurants, banks, telecommunication companies and automobile dealers.
Auto sales have been strong for most of the year with increases in sales coming in the late summer months. August sales were particularly strong, even in Saipan, which was in the midst of recovering from Typhoon Soudelor. Yes, some of the sales were sure to have come from replacement vehicles that were damaged from the storm, but the dealers we spoke to felt it was a combination of replacement sales and pent-up demand from the consumer.
The additional auto loans, money in consumers’ pockets and jobs as well as the buildup have resulted in strong performance for the local banks. In addition to an increase in auto loans, banks we spoke to reported strong consumer lending, declining delinquencies, increased deposits and businesses opening new lines of credit for anticipated projects in 2016. In a nutshell, the formula you would expect for an economy set to take off.
Tourism
Tourism arrival to Guam continues to flourish with August representing the third highest and March representing the sixth highest month on record when 135,498 and 132,334 visitors hit our shores, respectively. Year to date as of August year over year arrivals are 1.7% higher than 2014, which in itself was a strong year. However, growth in numbers isn’t the only change in the market as the visitor demographics have experienced a major shift in where visitors are coming from and how they are getting here.
Japanese outbound traffic continues to languish as Japanese travelers choose domestic travel over international and the yen continues to be weak. In 2013, $1 cost ¥103. Today it costs approximately ¥120 resulting in a 14% reduction in purchasing power.
While the Japanese market is surely not good news, the Guam Visitors Bureau has done a tremendous job diversifying the market over the last decade, and other markets have seen tremendous growth. The August report from GVB had arrivals from Korea up 56.8% and the People’s Republic of China up 177.7%.
Additionally, traditionally visitors have arrived to Guam via large Japanese national carriers All Nippon Airways and Japan Airlines along with Delta Air Lines and United Airlines, our hometown airline. This is changing as more and more low-cost carriers enter the market from Korea and unscheduled charter service from Taiwan and China continues to increase.
What will make things more interesting is the hoteliers we spoke to have not given up on the Japanese market rebounding in the coming years. They believe the yen will strengthen eventually and the trend of domestic travel will shift back toward international destinations with Guam set to continue strong outbound coverage.
Nonetheless, demand for rooms is up resulting in double-digit increases in the average room rates on island over the last two years. These trends play well for GVB’s Vision 2020 goal, which is to make Guam “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 two key points to this vision are two million visitors and first-tier resort destinations. To accomplish this, the island needs approximately 1,600 new rooms and existing hotels need to upgrade their facilities. This process has begun with the complete renovation of Aurora Resort & Spa into the Lotte Hotel, the opening of Dusit Thani, upgrades to the majority of beachside rooms and facilities and the announcement of new hotel properties for the island.
Ken Corp. has announced the building of a new tower on its Nikko property. Ladera Tower has begun renovation to convert it from condos to high-end longer stay suites, and there are plans for multiple hotels in Tumon and an additional project on the Eastern shores in Pago Bay. All in all, 1,300 new rooms are in the pipeline to be on line in time for 2020.
Looming issues
Of course, nothing goes completely according to plan and there are some potential risks looming in the shadows. In addition to the obvious concerns of continued delay with the start of major military construction or any number of regional geopolitical issues, such as the South China Sea, North Korea or an avian flu outbreak, there are two major elephants in the room.
The first is the island’s Base Operating Support contract. This contract is a major portion of our economy. The Department of Defense awarded the current provider DZSP 21 LLC in September 2014; however, a protest has delayed contracting requiring DZSP 21 and its subcontractors to work off of bridge contracts. While work continues on base and employees continue to get paid, the delay has caused uncertainty for everyone involved.
The second is the issue of electrical power. At the end of August, an explosion ripped through the Cabras 3 and 4 power plant. The cause of the explosion and the time to repair — if to be repaired at all — remains unknown as of press time. What is known is that without Cabras 3 and 4, the Guam Power Authority has the capacity to generate 275 megawatts of power. While this is enough to cover peak load requirements of 250 megawatts, it requires generators that were designed to provide supplemental power to base load capacity to act like base load generators.
This is not a healthy environment, and any number of potential threats could result in Guam heading back to 1991-style load-shedding blues — not a recipe for success in an economy that is going to need more power capacity in the years to come.
Both of these issues need to be monitored closely in the coming months.
Summary
Guam is in a good place, there is a lot of excitement in the air and, from all accounts, the economy is heading to a better place in the next several years.
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