By Joaquin P.L.G. Cook
In my second year of contributing to this feature, I can say with comfort that 2023 was a year in which our island communities demonstrated resiliency and resourcefulness.
The Government of Guam is sitting on a budget surplus and certain sectors of the islands’ business communities are flourishing, while others are doing all that they can to survive.
It has never been more apparent than it is now that there are two some may argue three, economies at play in our region.
I am going to take some time looking at each of these economies, what is driving them, what is hurting them and what they have to look forward to in the coming year. Many of the issues are not unique to Guam, the Northern Mariana Islands or the region, but are global issues while some are unique to us in Guam, the NMI or the Freely Associated States of Palau, the Federated States of Micronesia and the Marshall Islands.
From a banking perspective, Guam’s economy appears to be stable and flat. Based on Guam Bankers Association data, total deposits reported by Guam banks and credit unions peaked in the second quarter of 2022 at $4.7 billion and have hovered in that area since with total deposits reported of $4.69 billion as of the second quarter of 2023. All the islands enjoyed an influx of money from federal aid and disaster assistance and for the most part, that money has stayed in Guam, or at least there have been inflows since to offset any major outflows of money from our economy.
On the lending side of the equation, total loans in the market have been stable at $3.8 billion since a high of $4.1 billion in the second quarter of 2020 due to the PPP loans during the pandemic. Even in this high interest rate environment we are living through, loans have held, and bad debt has not increased. This is a positive because it means that people have been obtaining new debt as existing debt is paid down, without missing payments.
In the past several weeks, David John, Maria Leon Guerrero, Maureen Maratita and I have been meeting with the leaders of the top companies in the region to discuss with them their wins in 2023, their opportunities in 2023 and what they are expecting in 2024 and beyond.
My grandfather, the late Jesus Sablan Leon Guerrero and founder of Bank of Guam, used to always talk to me about how our economy on Guam can be seen as a three legged stool.
The economy is supported by its tourism leg, its U.S. military leg and its local industry/government leg. If any of these legs were to be taken out, the economy would tumble. While none of these legs has been removed, we have seen at least one of them barely holding up its share.
In 2023, we saw continued spending by the U.S. military as the Department of Defense continues to build up its presence in the INDOPACOM theatre. It is no secret that Guam and the region — which I will discuss later — plays an important role in the military strength and presence in this part of the world, as powerhouses such as China and North Korea continue to be threats. Thanks to this activity, construction companies in the area, large and small, are as busy as ever. With more than $8 billion in projects planned in the coming years, the region has become an attraction for many DoD contractors and has been attracting new ones every year.
This has had its pros and cons for our communities.
The pros are the amount of dollars flowing through our economy. GovGuam is seeing increasing revenues thanks to the spending; many local businesses are seeing increased sales from military personnel and related personnel. Hotels that cater to the military continue to see a steady stream of guests arriving. Owners of rental properties are continuing to have military tenants.
All of these are contributing to the Guam economy and the military leg of our stool is by far the strongest one.
Of course, the increase in military work brings with it cons as well. There is some increased tension with locals, whether it be social issues, land issues or others. There is always a small faction of the island community that opposes an increased military build-up.
Much of the increased cost of living on island can be attributed to the military buildup. Construction costs — primarily labor — have been driven up by all the federal work and while this is good if you are working “inside the fence,” it is not so good if you work a civilian job or are a civilian trying to get a local project done.
While there has been some movement in getting additional labor on outside projects, there is still a labor shortage in this area and the island is suffering as a result. There is also the impact on tourism, which has historically been the islands top industry and, in my opinion, is still the most sustainable economic driver that we have. The increase in military personnel on Guam has made it difficult for tourists to find rooms at times. The added travel by military personnel to the island has also made it more expensive for travelers to get to Guam, whether it be returning residents or tourists.
Which brings me to the island economy’s second leg: tourism.
Since 2020 when the island shut down due to COVID-19, we have been struggling to attract any meaningful number of tourists back to the region. In 2022 we saw a gradual return to arrivals and many in the industry were optimistic that by this time — the latter half of 2023 — that we would be seeing more of a rebound of tourists from our primary source markets of Japan and Korea. Coming out of 2022, we were at just under 60,000 civilian arrivals as of December 2022. In March 2023, that number increased to just over 60,000 arrivals and although very slow, we saw an upward trend in arrivals. From that point through the end of the second quarter we saw a steady decline and then a fall off in June, post Typhoon Mawar in May. The third quarter saw an increase in numbers to the highest monthly arrival number we have seen since COVID-19 of just under 70,000 in August, which is typically a very strong month for Guam’s tourism. This number is dwarfed in comparison to the 2019 August arrivals number of 160,000.
As in prior years, September saw a decline in arrivals with a further decline in October. Put into perspective, in 2019, as of October, year-to-date, the island welcomed more than 1.3 million civilian arrivals versus 521,000 as of year-to-date October 2023. Based on these numbers we are still below 50% of 2019 arrivals, which is not a good indicator of economic activity for the island since tourism historically is our top contributor to the economy.
Unlike military spending, tourism spend has a much wider reach. Tourists are more active in the day visiting sites around the island, eating at restaurants, going on tours, shopping at retail stores … all of this means more jobs for more people, which eventually circulates more money within the local economy.
Such a sharp decline in tourist arrivals is of great concern, and we need to understand why.
Certainly, the yen vs dollar exchange rate does not help attract Japanese travelers, as it makes Guam an expensive destination, but I think that this is not the main reason we are losing travelers. That reasoning would make sense if other U.S. dollar-based destinations that promote a similar experience as Guam does — Tropical America — were also struggling, but that is not the case.
Hawaii has almost returned to its pre-pandemic Japanese visitor arrivals even in a weakening yen environment. The reason that we have not seen a nice rebound of Japanese tourists and the reason that we have, in fact, been losing our share of the outbound Japan travel market, is that our product needs to be redefined, redeveloped and improved. We market sand, sea and sun, but there are other destinations that are less expensive to get to, less expensive to stay at and offer more activities and those destinations are beating us out. Destinations such as Bali, Thailand, Vietnam and other southeast Asia areas are picking up the market share that we are losing. As a community dependent on tourism, we need to improve our offering and improve our exposure to the traveling world. Only then will we see greater demand for travel resulting in greater flight options and lower costs to get here.
The third and final leg of our three-stool economy is our local population.
This economic force is driven by government and private employment that is both directly and indirectly related to the other two legs. It goes without question that if the other two legs are stable and strong, the third leg will also be stable and strong. Healthy military spending and healthy tourism dollars coming in will result in a healthy local economy. Jobs will be available; taxes will be paid, and money will circulate throughout the economy. In 2023, we saw a very interesting year with unemployment at a low compared to recent years, wages getting pressure to be moved upwards to keep pace with federal jobs — all while every company we spoke to expressing how difficult it is to find good employees. This leads to issues with retention, because every single business, the local government and agencies, and the federal government are all trying to attract top level talent. Salaries are typically the largest item on a company’s P&L, so naturally, in an environment where this expense is increasing, margins are squeezed. This is what is happening to many local businesses on top of other increasing costs of operating: utilities, the cost of goods sold, inventory, food costs, etc. Depending on what business you may be in, there is an overall sentiment that costs are going up and margins are getting squeezed.
In addition to the competition from the federal government and contractors with large federal contracts, there are other issues that employers are facing when trying to fill vacancies. Those are the quality of labor available on island and the ability of individuals to keep jobs. Skills need to continue to be developed by Guam’s educational institutions and vocational entities. There is a gap in the quality of skilled workers the island provides, but additional training programs are coming online more and more to fill this void.
My only word of caution to upskilling our island labor force is to think about what the consequence could be five to 10 years down the road, when all the construction projects start wrapping up. At that time, we could find ourselves in the position of an abundance of skilled construction laborers and not enough construction projects to support the pool. We could see an exodus of families then, as they follow the construction cycle around the world. We experienced this in the 1990s with the Base Realignment and Closure, when a lot of skilled employees moved to the mainland when bases were downsized. That said, I never feel it is a bad move by any community to upskill its citizens. After all, the goal should be to provide the highest quality of life possible for anyone who wants to work for it.
In summary, even though one of Guam’s economic legs is weak, the other two are currently providing enough support to keep the stool standing. This is not sustainable, however, as we will continue to lose talent to opportunities with the federal government and to opportunities off-island. We need to do what we can to revive and strengthen our tourism industry by attracting new investment dollars to improve our island product, and at the same time attract investment for new industries that could help drive our economy and ultimately the quality of life for all on island.
The Northern Mariana Islands
I recently visited our brothers and sisters in the NMI and had some very good discussions on the economy there. Saipan is still faced with the question of what to do with Imperial Pacific International’s casino building, which continues to be an eye sore in the middle of Garapan.
Gov. Arnold Palacios recently visited Taiwan in hopes of creating partnerships to bring more tourism dollars and additional investment from abroad. It saddens me to say that without tourism returning to the NMI, there is little happening there to turn that economy around.
Saipan is experiencing a similar situation to Guam. There is a lot of Federal Emergency Agency money to deploy, as well as NMI government money waiting to be spent on road work and other infrastructure improvements. The NMI is also limited by the labor pool available for such work. Previously the NMI relied on the arrival of contract workers, primarily from Philippines, but this number has been reduced by Congress, which is impacting construction projects on the island, as well as business sectors in general.
Despite all their struggles and the lack of tourists from Japan, there are several bright spots in Saipan. On my last visit there, I dined at several new restaurants that were quite good. Concepts that would rival restaurants in Guam are popping up in Saipan and they are worth traveling north for. Additionally, Marriott recently announced that it will be branding a hotel in Saipan with its name. While there are issues with the Marianas Public Lands Authority’s renewal of the lease of the property, Marriott’s willingness to brand in Saipan is a positive. Hyatt did renew its lease and is required to undergo major renovations as part of the agreement. In addition, the Crowne Plaza has opened since the pandemic, all of which should lift the tourist experience in Saipan.
Tinian is currently the hot spot of the NMI, with hundreds of millions of dollars going in to reconstruct the northern end of the island for a divert airfield and supporting needs. This activity is changing the face of Tinian, and will be good for the island, with the arrival of more people, planned training, higher port usage, etc., all of which will drive the island’s economy. We have already seen an increase in the traffic at our branch in Tinian due to the hundreds of workers there on projects. You also see some overflow to Saipan on the weekends, as military personnel and construction workers fly to Saipan to enjoy their time off in the hotels, bars, and restaurants.
The Federated States of Micronesia, Palau and the Marshall Islands
Since the pandemic, the FSM has seen a nice inflow of cash from all the families that live and work abroad. Remittance services and electronic movements of funds have been at a high since COVID-19. This is what has kept the economies in these small islands afloat. Now that there have not been travel restrictions, it is possible for people to visit the islands freely.
The limiting factor in the FSM is infrastructure. There continues to be a small range of hotels a tourist can stay at when visiting these island states and this will continue to create a cap to attract visitors from abroad. There have been talks of new hotels in Pohnpei, as well as discussions to improve connectivity via submarine cable but nothing to date has come to fruition.
Palau has seen some return of tourists and enjoys a nice boost from Chinese travelers. Nothing close to the levels experienced in 2018, but by design. Palau has gotten creative with its economy with the creation of digital citizenships, which has been quite popular. There have also been new construction developments on Palau. Recently the new Surangel Shopping Center opened and there is talk of a new WCTC building to be constructed as well. Additionally, there is consistent growth of business in the north island of Babeldob, where the capital is located. New gas stations have been placed on the perimeter road and businesses such as general stores, laundromats, and restaurants offer these choices to villagers who live further away from the busy and bustling Koror.
The Marshall Islands continue to enjoy business that their fish filled waters give them. Walmart has signed an agreement with the Marshalls to provide a large percentage of the store’s tuna. This is in addition to the already active tuna industry in the region will only add to the island’s coffers. New and exciting things that we saw in 2023 include the opening of a new bank, Pacific International Inc.’s Pacific Regional Bank.
Additional flights to all three countries offer inbound visitors and easier connections around the region.
The most exciting event to happen in 2023 for all three island nations was the conclusion of their respective Compact of Free Association negotiations. Each nation had a separate set of negotiations with the United States that covered financial support, U.S. federal services support and other items. The existing compacts for the FSM and RMI expired this year and Palau’s is set to expire in 2024. While yet to be officially approved by the U.S. Congress, these agreements look to bring additional government revenues into the islands, which will be good for their communities. I am looking froward to infrastructure development and improvement in these islands, which will make it easier and more cost efficient to do business there. It should also give their communities greater access to online services and digital products that are not currently available.
The three island nations are also heavily involved in the expanding U.S. military presence in the Pacific. Of the projects slated in this region, there are 35 totaling more than $4 billion happening in the FSM, Palau and the Marshalls, wth divert airstrips and missile defense systems topping the list. Added military activity in the region is also good for local businesses as hotels and restaurants will experience increased traffic and sales.
In the next five to 10 years, our region will see a changing landscape as the U.S. military continues to build and fortify its presence in the Pacific. This keeps our economy afloat in the absence of meaningful tourism. We need to use this time to pay attention to our struggling tourism industry. It needs new life, new energy, new ideas and new reasons to visit our islands.
There has been minimal investment into new and exciting venues in Guam. Most recently in Guam we have seen the upgrades to the Sandcastle and related companies, as well as the newest hotel, The Tsubaki Tower. We need to pay greater attention to our islands top ad most sustainable industry. The military is not going to leave, so that will be a boost for a while, but the buildup won’t last forever. While we have the money coming in from that leg supporting our economy, we need to do what we can to build back our tourism industry to the levels we experienced years ago. When we have that leg supporting in addition to the military, then we can look to add additional legs to the stool.