What 2023 holds in store for Guam’s economy
By Frank Whitman
It has been nearly three years since Covid-19 began to wreak havoc on Guam’s economy. While the virus continues to infect island residents, albeit in decreasing numbers, the community is adopting a post-pandemic mindset and lifestyle.
“During 2022, we saw the first glimmer of hope that Covid was in the rearview mirror,” said Philip Flores, president and CEO of BankPacific. “One of the functions of demand is psychology and demand drives the economy. As a result, 2022 was definitely better for the economy. However, much of the improvement for the ‘man on the street’ was offset by runaway inflation.”
Officials are looking to stimulate economic growth by supporting and encouraging federal and military spending, which have remained strong during the pandemic; by resuscitating tourism, a longtime economic engine for the island that has been decimated; and looking to identify new market sectors to broaden and strengthen the island economy.
In October 2019, five months before the start of the pandemic, Guam welcomed 134,830 tourists, according to the Guam Visitors Bureau website. A year later, with the pandemic in full swing, that number had dropped 98.3 percent to 2,331 tourist arrivals in October 2020. Two years later, with the easing of pandemic travel restrictions, arrivals have begun to increase and in October 2022 arrivals were at 31,433 – a dramatic increase over the previous two years, but still only 26 percent of the October 2019 arrivals.
GVB forecasts conservatively that during fiscal 2023 tourist arrivals will increase 33 percent from pre-pandemic levels. GVB also issued what it terms an optimistic forecast of 41 percent increase for the same period. It also indicates that airline seat capacity is expected to increase by 27 percent in January 2023.
David John, CEO of ASC Trust Inc., told the Pacific Island Times he believes tourism will pick up in the second half of 2023 as the Japanese government’s domestic travel program concludes and the yen gets stronger.
“However, we cannot assume things will return as they were in 2019,” John said. “Members of the tourism industry and GVB should be working together on a single plan. ... Instead, GVB hasn’t met in six months due to infighting over bylaws and enabling legislation resulting in multiple new tourism groups forming to replace the leadership of GVB. This needs to change for tourism to successfully return.”
“I expect federal spending, especially in the area of defense, to remain strong for the next decade,” John said. “This constant should act as a steady keel for the economy.”
In November, Department of Defense officials told participants at the Guam Industry Forum 2022 that the Northern Mariana Islands, the Federated States of Micronesia and Palau can expect $1.2 billion to $2 billion of military construction per year for the next seven to eight years. Construction of facilities to accommodate the relocation of U.S. Marines from Okinawa to Guam has been ongoing for more than a decade, providing stimulus to the local economy and meeting the needs of the U.S. military.
Spending on the Marines relocation – the Defense Policy Review Initiative – peaked during fiscal 2021 when the Navy awarded work valued at $1.45 billion, according to Will Boudra, director of the Guam Program Management Office (which oversees DPRI projects) at Naval Facilities Engineering Systems Command Pacific and, at the time, acting director of the recently established Joint Posture Management Office (which is to oversee work related to the year-old Pacific Deterrence Initiative).
Relatively new, PDI was established in December 2021 in response to the “multi-domain threat posed by China,” according to an April 2022 report from the undersecretary of defense.
“The intensive military buildup with billions of dollars in construction will fill the hole in the economy caused by the lack of tourism,” said Siska S. Hutapea, president of Cornerstone Valuation Inc. The construction will have long-term economic benefits, since eventually the new facilities will require skilled laborers for facility maintenance, she said.
During 2022, double-digit inflation caused prices for housing, food and transportation in Guam and in the U.S. to skyrocket. Among the items listed in the Bureau of Statistics and Plans’ Guam Consumer Price Index for the third quarter of 2022, housing costs increased 14.6 percent over the third quarter of the previous year; electricity increased 53.2 percent; the price of gasoline increased 15.8 percent; and egg products increased 42.2 percent over the previous year.
John said he expects inflation rates on island and in the U.S. to decline below 5 percent by the end of 2023 as rates in the U.S. move toward the Federal Reserve’s target of 2 percent. “However, I do not believe we get to 2 percent inflation within the next eight quarters without a sizable recession,” he said.
Flores said he does not see a reduction in inflation in the near term. “The best is perhaps it will level out as a result of the Federal Reserve’s efforts to slow down the economy in the states.”
The Federal Reserve’s efforts to fight inflation by raising interest rates have made housing unaffordable for many. “Moreover, the supply side of real estate is dampened as construction costs are skyrocketing,” Hutapea said. She noted that an increase in the number of H-2B workers should help increase the real estate supply.
The slow recovery of tourism is exacerbated by a strong U.S. dollar and the devaluation of Korean won and Japanese yen, the currencies of Guam’s two major tourist markets. “This will impact the commercial/retail real estate market, and of course hotels,” she said.
“Affordable and attainable housing is one of Guam’s biggest challenges,” she said. “Staff needs housing that is accessible to employment centers.” Since Guam lacks reliable public transportation, housing is particularly needed in the central part of the island.
Flores said he expects property values to level out this year. “Demand is still there,” he said.
For decades there have been discussions and efforts to diversify Guam’s two-legged economy to provide more stability. The latest such effort began in late 2020 when Gov. Lou Leon Guerrero, with the Guam Economic Development Authority and the Guam Chamber of Commerce, launched an economic diversification working group. It is chaired by Melanie Mendiola, CEO of GEDA, and co-chaired by Hutapea, who is also a board member of the Chamber of Commerce and GEDA. John is the chair of the GEDA board.
The group has looked at industries that it believes would complement Guam’s current economy. “Many (industries) were looked at, but a few have moved in a meaningful way far quicker than I could have imagined,” John said. These include cable landing stations and data centers, ship repair, safe harbor for military ships, and additive manufacturing (3D printing). “If these industries combined could create another 5,000-plus well-paying, middle-class, skilled jobs over the next five to 10 years, it could be transformative to our economy.”
In addition, GEDA was allocated $13.17 million under the federal State Small Business Credit Initiative program to be used for three lending programs: $1.3 million for a capital access program, $4.6 million for a loan participation program and $7.2 million for a credit guarantee program. The goal of the program is to “empower small businesses to access capital for creating new job opportunities,” Hutapea said.
John, meanwhile, summed up the outlook for Guam in the coming year. “If tourism can catch footing and start to return in meaningful numbers, 2023 could end up being a very good year for the revenue side of our economy,” John said.