David J. John
ASC Trust Corp.
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. Each year a clear economic pattern forms from the discussions of these meetings.
This year was no different. Almost without exception, the trend was the year started out well, by third quarter business fell off and currently most executives are somewhat concerned of an intermediate term pull back in the economy (possibly even a short recession). Yet over the long term most were positive — if not bullish — on the economy.
For the fiscal year ending Sept. 30, the tourism industry had another record year with 1.56 million visitors coming to Guam, representing a 3.2% increase over the previous record set in fiscal 2016. Additionally, visitor spending increased 8.5% to $1.75 billion and hotel occupancy was steady at 76%.
While those that do business in the region understand that Guam is a small, concentrated economy dependent on two industries (tourism and military) and is vulnerable to natural disasters, we often forget how our economy is directly tied to geopolitical events. Then came the increased escalations in tensions between Pyongyang and D.C., with Kim Jong-un naming Guam as a potential target for a nuclear missile, followed by President Trump promising “Fire and Fury” and labeling Kim “Rocket Man.”
In the five weeks that followed the Aug. 9 threat by Kim Jong-un, Guam’s tourism numbers fell an estimated 9% with 7,500 group cancellations representing an estimated $9.5 million loss to Guam’s economy. The cancellations appear to have stopped, but new reservations slipped 12% in September and at least one head of a major hotel believes we could be looking at a double digit pullback in the fourth quarter.
While the North Korean situation should pass one way or another for Guam, a trend that continues to cause concern for many in the industry is where the tourists coming to Guam originate. Prior to the heighted tensions, the macro tourism numbers were strong, up 11%, but this was due to a 41% increase in travel from South Korea — offsetting a 13% decline in visitors from Japan.
This is a trend that has been building for some time. Over the period 2010 to 2016 Japan percentages of arrivals slipped from 76% in 2010 to 50% in 2016, falling below 50% in 2017. This is not a minor adjustment, but a complete rotational trend. While Guam should see an uptick in Japanese arrivals once the situation with North Korea clears, some of this story is not reversible and is due to a macro trend in Japan of increased domestic travel which can be explained through a combination of Abenomics, new train networks, improved domestic facilities, aging population and a weakening long term trend in the value of the Yen.
To anticipate the outlook of what to expect from these two markets going forward, you only need to look at air capacity. In 2017 Air Seoul became the 6th carrier from Korea to provide direct services to Guam. Conversely, Delta is suspending Tokyo-Guam flights in January 2018 and United announced that frequency will be reduced between Guam and Fukuoka, Nagoya and Sendai. The airline will suspend its twice-weekly flights out of Sapporo, and some flights between Guam and Narita will be covered by smaller planes.
I should stress that those in the hotel industry we talked to believe that a shift from a Japanese centric market to a more balanced market, made up of the two major markets of Korea and Japan and multiple smaller markets such as China, Taiwan and the Philippines, should result in a stronger, more robust market over the long term. The concern is that most businesses — from bussing, to hotels, to restaurants to rent-a-car operations —have a business model designed for the Japanese tourist.
In addition to language barriers, Korean guests have different habits, expectations and purchasing patterns. For example, Korean guests are much more likely to stay in a guest house or an Airbnb-type operation instead of a major hotel. With this, even if arrival rates hold up going forward, beachside hotels need to be concerned about their average room rates, which they have worked hard to increase in the last five years (in 2012 the average room rate was $155, this year it hit $210).
Further, for the tourism industry to continue to prosper in the long term, most executives we spoke with believe we need to improve our product. While the recently completed 419 room Dusit Thani Guam Resort and the 340-room Tsubaki Tower expected to be completed in 2019 are a good start, Guam’s tourist sites and amenities need to be improved, which will require government spending. The government spending will need to come from the Hotel Occupancy Tax and if room rates and occupancy numbers fall, so will the HOT, which will make it harder to improve our product.
Depending on who we spoke with, executives in the industry were either really excited about what was going on and where things were headed or extremely concerned. This is not due to lack of projects. The Guam Department of Labor’s Economic Outlook report painted a stable picture for 2018, citing stability and growth in civilian construction with the long awaited Marine relocation plan gathering traction in recent months.
According to the report, there are more than $200 million in private and Government of Guam projects currently underway or backlogged, to include the Tsubaki Tower, Emerald Ocean View Park (the four unfinished towers on Oka Point), Guam Memorial Hospital upgrading and A.B. Won Pat International Airport, Guam terminal work.
Additionally, major water, power, port and road infrastructure projects as well as $225.2 million in military construction are scheduled to be awarded this year. Guam’s construction industry should be humming. The problem is labor.
Guam’s construction labor force is made up of a combination of local labor and H-2B visa holders with recent ratios at about 5,000 local workers to 1,500 H-2B workers. Additionally, it is predicted that when the buildup hits its peak, it is expected that the H-2B workforce will need to grow to between 4,000 and 5,000.
Given these figures and that the relocation of the Marines is a federal government project, you would think that the federal government would be working to ramp up H-2B hiring. Instead, the approval rating for H-2B visas for Guam was down to virtually 0% in 2017, with approximately 139 total H-2B workers left on Guam.
The logic for this policy change was that Guam contractors were abusing the system and that workers could be recruited from the U.S. mainland.
However, bringing workers from the states in normal times is tough, due to the distance Guam is from workers’ families, as well as the pay structure in Guam. And after two major hurricanes hit the U.S., there is more than enough work stateside. So at some point in time the powers that be will need to allow H-2B workers onto the island or risk compromising the buildup altogether.
In addition to causing concerns for the buildup, this unexpected cutoff of H-2B workers has created a real problem for local businesses, as workers that are usually available to do small projects outside the fence are being pulled into the larger operations doing federal contracts. This has driven up costs (costs to build a single family home, if one is lucky enough to find a contractor, have risen from $100 per square foot to $200 within the last 24 months) and created an environment where certain projects do not even receive one bid (to include the most recent RFP by the hospital). If bids are made, many are too expensive to proceed.
It was the consensus of those we spoke with that there will be some type of H-2B resolution in the first quarter of 2018 and workers should return to Guam in time for the anticipated start of the projects currently awarded. However, there is a possibility that these workers will only be allowed for projects on base, which would require the workers to be Green Card holders and would not much help business and the Government of Guam with their construction projects. Stand by.
Base Operating Support contract
Outside of tourism, construction and direct government spending, the Base Operating Support contract is probably the next largest piece of the local economy, employing approximately 1,000 workers. The current provider, DZSP 21, has held the contract since 2005 and was re-awarded the contract in September 2016. However, the contract was protested more than once and in September the contract was awarded to Fluor Federal Solutions. DZSP 21 has since protested the award. The lack of clarity in this contract has provided much angst to the local work force, the military and the companies involved.
The slowdown in the tourism industry, the lack of workers to build single family homes and small projects and the lack of clarity with the BOS contract have created an environment of uncertainty to the consumers (workers) of Guam. This has led to consumers holding on to their money and cutting back on spending on large ticket items like automobiles, which is another big part of our economy.
The Northern Mariana Islands
According to a recent report by the U.S. Department of Commerce, the Northern Mariana Island’s Gross Domestic Product was $1.24 billion in 2016, a 28% year-over-year increase, with what is anticipated to be additional double digit growth in 2017. The driver for the economy has clearly been led by growth in tourism (up 10% year over year) and the opening of the Imperial Pacific casino. The success of the tourism industry has had a multiplier effect on the rest of the economy and has led to additional hotel projects and a 60% increase in private fixed investment in 2016.
The year 2017 started out bright. However, the economy seemed to stall in the second half of the year due to regional geopolitical tension with North Korea and D.C. not understanding the need of H-2B workers to complete the Marine buildup. These trends will need to reverse or Guam’s economy will face little to no growth, with a possibility of a short recession to start 2018.
While the short term outlook is uncertain, the long term prospects for Guam’s economy remain on firm footing. This position is backed by Moody’s Corp. in its recently released Investors Service Report on Guam, which generally cited positive medium to long-term trends and a good economic outlook, with a declining unemployment rate and nominal gross domestic product growing at a compound annual rate of 3% from 2010 to 2016.