**An Update on the Economies of Guam and Commonwealth of the Northern
Mariana Islands (CNMI)**

By

Wali M. Osman, Ph.D.

Regional Economist

May 2004

I. Introduction

Following several years of stagnation and decline, Guam's economy is
headed for recovery and growth. The levels of activity in the two main
engines of growth, tourism and national defense, are rising, although
for different reasons and with different effects on Guam's economy, the
labor market and public finances.

While benefiting hotels, restaurants, shopping malls and other
facilities catering mainly to tourists, increases in tourist traffic
without discernible increases in the average tourist spending tend to
have subtle and gradual effects on the economy, government finances and
the labor market. With Guam's hotel occupancy rates averaging in the
50-60 percent range during most of the last 3-4 years, currently
projected increases in tourist traffic are a long way from bringing
financial strength to local hotels and making a visible impact on the
rest of the economy. At such an early stage of recovery and expansion,
gains in tourist traffic have to be registered for several months to be
considered a turning point from the current stage of the business cycle.

By contrast, increases in defense spending, especially in force and
personnel, refurbishment of base facilities and new construction
projects tend to have a more perceptible effect, as some of these create
immediate work opportunities. Now that both tourism and defense outlays
are rising simultaneously, the prospect for recovery in Guam's economy
is better than in several years. It is too early to suggest the depth
and breadth of this recovery, but if both tourism and defense spending
rise consistently for 4-6 months, it will be possible to make a more
quantitative assessment of gains in business, the tax base, public
finances, employment and, eventually, total output.

I.1 Recovery in Tourism

Recovery in tourist traffic is fueled by what still appears to be weak
but consistent signs of economic growth in Japan. Having suffered from
one of the longest periods of decline and stagnation, the Japanese
economy began to show signs of regaining some momentum in early 2003.
The 1.5-2.0 percent growth rate the Japanese economy has registered
since early last year is much lower than its own record during the years
preceding the 1990s decline and what the economy needs to make a broader
regional impact. However, the fact that the Japanese economy is no
longer declining is in itself an important signal of better times ahead
and travel abroad. Adding to the momentum in the Japanese economic
recovery is the prospect of a stronger world economy, especially in
China and the rest of Japan's neighborhood and across the Pacific in the
United States with which Japan has significant economic and financial
ties.

In addition to economic and financial recovery returning to Japan,
safety and stability in global air traffic in the post-September 11,
2001, world has also been an important factor, especially for Japanese
travelers who are among the most cautious tourists. Air traffic safety,
in conjunction with an improving economy, has encouraged many Japanese
to travel abroad again. Japan's travel industry expects the number of
outbound Japanese travelers this year to rebound toward the 17-19
million level, considered normal for Japan. Japan's outbound travel in
the last few years dropped to the 14-15 million mark.

Among tourist destinations in Japan's neighborhood that benefit directly
and immediately from a Japanese economic recovery is Guam. Guam's
principal advantages are proximity, Guam's "America in Asia" cultural
attributes and reasonably good facilities. When the Japanese economy
returns to normal patterns of growth, Japanese tourists returning to
levels considered normal for Guam would be only a matter of time.

In 2003, Guam received 909,506 tourists. Not only was this number 14.1
percent below the previous year, this was the first time in a decade
that Guam had fewer than one million tourists. Tourist arrivals to Guam
peaked at 1.382 million in 1997, the onset of the Asian financial
crisis, and dropped 17.1 percent in 1998. A modest recovery followed in
1999-2000, when it was derailed by the aftermath of terrorist attacks on
New York and Washington in September 11,2001. In 2002-2003, air traffic
concerns, the weak Japanese economy, severe typhoons and the SARS
epidemic all combined to keep Japanese tourists away from many
destinations. Since Guam did not play a direct role in the
post-September 11 military buildup related to the war on terror, it did
not benefit directly from spending emanating from the war.

In 2004, most of the economic, financial and security factors affecting
Guam's tourism are moving in directions favorable to the American
territory's economy. Defense spending on Guam has more to do with
refurbishing facilities damaged by typhoons and aging, rather than moves
related either to the war on terror or new defense initiatives in Asia.
Increases in force and personnel have thus far been limited to a small
submarine task force unrelated to the war on terror. Still, the trend of
rising defense outlays on the island certainly adds more momentum to
economic and financial recovery than tourism because of its higher
multiplier effect, as more of defense dollars tend to stay in the local
economy. Anecdotal evidence on defense spending increases provided by
bits and pieces such as contracts put out for bid or awarded reported in
the local media is much more favorable to Guam than has been the case in
the last few years.

Changes in tourist traffic and its impact are, on the other hand, more
readily quantifiable because of more current and complete data on
tourist arrivals and spending which the Guam Visitors Bureau routinely
maintains. In January, tourist arrivals increased 76 percent to 101,515
from 57,826 in January of 2003. The percent change is large, but that,
in fact, is merely recovery to a level considered normal for Guam. With
over one million tourists a year every year in 1994-2002, the average
monthly figure, with adjustments for seasonal variations common to
tourist traffic, was around 100,000. In 2003, Guam did not receive
100,000 tourists in any month.

With tourist traffic in the first month of 2004 returning to what may be
considered normal, the expectation is that Guam will have, once again,
one million tourists this year. If that happens, it will mean not only
some level of recovery in tourism and the economy but regaining
confidence that Guam is indeed a major regional destination that has
experienced substantial but mainly cyclical changes that now appear to
be past. Also, higher levels of tourist traffic and subsequent increases
in hotel and other taxes would contribute to improving the financial
condition of the territory. A 50 percent increase in the local gross
receipt tax (GRT) from 4.0 to 6.0 percent, implemented in April 2003
because of a financial emergency, was repealed this March. The main
reason for approval of the repeal by Guam's Legislature and the Governor
was the expected increase in local revenues, emanating from both tourism
and national defense gains.

I.2 Financial Recovery

The territory's overall financial health is another story. As of January
this year, the Government of Guam (GovGuam) was still paying individual
tax refunds for tax years 2000 and 2001, and some GovGuam agencies were
still in arrears in rent and vendor payments. GovGuam still has other
formidable financial obstacles to overcome. Among them is a large
operating debt for which GovGuam wanted to issue new bonds; the case is
in the courts of law, rather than in financial markets. Guam's attorney
general challenged GovGuam's prerogative to issue bonds based on
assessed value of property to retire existing operational debt. The
Ninth Circuit Court of Appeals in San Francisco is to decide whether
GovGuam is within its legal authority to issue such bonds.

Given information gaps that have not yet been remedied, it may be some
time before a more objective assessment of Guam's economic performance
is available. However, the signs so far this year indicate a path to
recovery. With its aging tourist infrastructure and extensive damage
caused by a series of destructive typhoons in the last few years, the
American territory's impending economic recovery may once again attract
foreign capital and skills to launch the next stage of business and
economic recovery.

II\. CNMI

Unlike Guam's economic growth engines which are gaining momentum at the
same time, CNMI's tourism and garment-making are on two different
tracks. Much of what can be said for Guam in the context of tourism
applies to CNMI as well since its main tourist market is also Japan. The
CNMI tourism industry expects a 20-percent increase in total tourist
traffic this year, which would raise total arrivals to about 570,000.
While better than 2003's total, even that level of tourists would be far
short of the 736,000 CNMI received in 1996. Just as in the case of Guam,
recovery to the previous peak may be some time away, but the improving
Japanese economy will make it possible to move in that direction. Since
CNMI's financial condition has been much less tenuous than Guam's,
remedies needed to restore financial health and a more tenable debt
situation would also be easier to obtain.

The garment industry on Saipan faces different challenges. As January
2005 nears, Saipan garment-makers would be expected to search for other
markets where production costs may be lower. However, it is unlikely
that Saipan garment-makers would move abroad at once, even under the
most difficult conditions. The most likely scenario for Saipan's
garments is that they will continue to produce at current levels (around
\$800-900 million of gross sales) during 2004. If that is to be the
case, CNMI's economy will do better this year than in the last 2-3
years.

Beyond the uncertainty surrounding garment-making, a somewhat
longer-term prospect for CNMI looks more promising, mainly because of
the emergence of China as a regional tourist supplier. Outbound tourist
traffic from China is expected to increase substantially in the years
ahead, and CNMI's advantage is in the presence of tourist facilities
already on the ground that cater to Chinese tourists. Also, since
CNMI-bound tourists do not need U.S. visas, as they do to enter Guam,
CNMI has the advantage to receive Chinese tourists any time once China
places the Commonwealth on the list of "approved destinations" and
allows Chinese citizens to travel there. The hotel and casino on Tinian,
although struggling to stay open since they started business in 1996,
have the capacity to receive and entertain large numbers of Chinese
tourists. In fact, there is already a plan for expansion should
circumstances call for an increase in capacity.

The fact that the Tinian facilities are owned and operated by Chinese
interests from Hong Kong is a plus for the operators. They know the
Chinese gambling market and how to attract tourists from that market to
CNMI which is a relatively short flight from either Hong Kong or
Guangzhou (Canton), the main city in southern China. With Chinese
tourists increasing in the years ahead, simply because per capita income
is rising at the rate that occurred in Japan in the 1950s and 1960s and
Korea during the 1970s and 1980s, CNMI has both the facilities and the
cultural and linguistic advantages to receive Chinese tourists. It may
be some time before Tinian becomes a mini-Macao, but it certainly has
the potential.

The main comparative advantage CNMI has as a tourist destination is that
it has more than one island, and each has its own attributes and
comparative strengths. Rota is a preserved area and it may remain that
way in the foreseeable future. Still, one of Rota's most valuable uses
may be as a meeting facility for world and regional leaders when the
island has facilities for such a purpose. Tinian's infrastructure is
currently geared mainly toward Chinese tourists, possibly Korean
tourists as well, especially gamblers. Other tourists and local
residents are just as welcome to the casino and hotel as anyone else.
With the mix of tourists and tourist facilities it has, CNMI is in an
advantageous position to benefit from economic recovery in Japan and
increased outbound travel from China.