Overview

S&P Global Ratings' long-term rating on the Government of Guam (GovGuam) reflects its inherent vulnerability to exogenous shocks that have the potential to weaken its economy due to its reliance on tourism and the military, weak system support reflecting the policy and fiscal relationship with the federal government compared to states, and an improving but still weak financial position characterized by weak unassigned reserves balances. The ratings additionally reflect the territory's weaker economic metrics and demographic trends compared with the national average and high debt levels.

Leisure and hospitality remain a central component of Guam's economy. Due to its location, it relies on visitors from the Asia-Pacific region, particularly from Japan and South Korea. Guam experienced continued anemic visitor arrivals in 2022 as a result of travel restrictions from other countries similar to 2020 and 2021. For fiscal 2022, while visitor arrivals improved from the previous year, they remained about 30% of 2019 arrivals. In our opinion, the COVID-19 pandemic and global containment efforts will continue to have a significant negative effect on the tourism industry for the territory even as other sectors recover. On the other hand, the ongoing military build-up also offers stabilizing support to the economy in the interim. The National Defense Authorization Act (NDAA) for fiscal 2022 authorized over $765 million for military construction in Guam, which represents a continued commitment by the Department of Defense (DoD) to the military build-up.

While the economic momentum since the height of the pandemic has protected most economies this year, S&P Global Ratings' baseline economic forecast reflects the U.S. economy slipping into a shallow recession in 2023. With supply-chain disruptions persisting and inflation remaining stubbornly high, although likely having peaked in third-quarter 2022, broader economic conditions will soften, and unemployment is expected to increase. (For additional information, see "Economic Outlook U.S. Q1 2023: Tipping Toward Recession," published Nov. 28, 2022, on RatingsDirect.) For Guam, its ability to navigate future economic and financial uncertainties are critical to maintaining credit quality given its limited reserves. We will expect GovGuam to employ a multipronged approach of reserves and sustainable budget measures to maintain its current financial operations. Global Market Intelligence's forecast for Guam shows that gross domestic product (GDP) growth could improve by 2.5% in 2023 after experiencing a 1.5% contraction in 2022 as it reflects delayed recovery in tourism.

GovGuam received a relatively high disbursement of federal funding as a result of the pandemic, which has helped steady the territory's finances since the pandemic, but we expect budget management to maintain the current level of operations as federal funding levels wind down over the next two years. Through federal stimulus efforts to reduce the effects of the pandemic, Guam received about $3 billion through various programs. While the territory general funds are not directly affected by the federal aid received, some of the funding has helped reduce the pressure on liquidity and transfers to other funds. Revenue growth in 2022 also helped Guam produce significant positive results and build reserves during fiscal years 2021 and 2022 to positive levels after over five years of negative general fund balances. However, while total general fund balances are now positive at 4.2% of general fund expenditures at the end of fiscal 2022, unassigned fund balance remains negative at $73.5 million or negative 10.1% of expenditures. Additionally, the territory was able to deposit into its rainy day fund, which has a balance of $14.5 million.

We believe GovGuam's 2023 revenue projections support a continued trend toward fiscal stability. Following an operating surplus in fiscal 2022 (unaudited) as a result of collected revenues exceeding budgeted revenues by about 14%, the territory's 2023 budget relies on a 12% increase in general fund revenue compared to the 2022 budget. Guam's two largest revenue streams to its general fund--income and gross receipts business privilege taxes--increased by 18.3% and 11.6%, respectively, in fiscal 2022 compared to budget. The proposed 2024 budget continues the trend of growing revenues and expects general fund revenue to grow by $65.7 million for the fiscal year.

Environment, social, governance

Environmental factors are a negative consideration in our credit rating analysis for Guam. As an island on the Pacific tectonic plate, the territory's exposure to physical risks is exacerbated by its size, the significant concentration of the economy in the tourism sector, and historically weak finances which limit the territory's ability to recover quickly from economic disruptions. Social factors are moderately negative due to social capital concentrations in tourism, which creates an exposure to the island's budget and economy. Finally, governance factors are negative, reflecting our view of Guam's weaker policy and fiscal relationship with the federal government compared to states, as well as its significantly high debt and liability burden relative to its tax base, although partially offset by the government's improved financial management in recent years. For more information, "ESG Credit Indicator Report Card: U.S. States And Territories," published March 31, 2022, on RatingsDirect.

Fiscal 2023 Budget Highlights

• General fund appropriations budget of $713 million, an approximately 5% increase from the previous year's appropriations and includes a 2% deposit into the rainy day fund.
• The budget maintains business privilege taxes at 5% and finances increases to health care and education appropriations.
• Fiscal 2023 year-to-date revenue collections through January 2023 are tracking $43 million above prior-year revenue.

Fiscal 2021 (latest audited fiscal year)

On a generally accepted accounting principles (GAAP) basis, fiscal 2021 ended with a $30.4 million operating surplus after transfers, which is an adequate 4.4% of general fund expenditures. On a GAAP basis, GovGuam's combined assigned and unassigned general fund balances at fiscal year-end Sept. 30, 2021, were $30 million, or what we view as an adequate 4.2% of GAAP general fund expenditures, up from negative $1.5 million the year before. Of the total fund balance, unassigned general fund balance was a negative $73.5 million, or a weak 10.1% of expenditures.

What We're Watching

• GovGuam's continued focus on structurally balanced budgets as extraordinary federal support begins to wane.
• The pace of the territory's economic recovery, particularly for its tourism sector and how a potential recession could impede recovery.
• Economic concentration in tourism and military spending makes the territory highly susceptible to factors beyond its control, including weather-related events, changes in federal disbursements, and international economic trends.

Credit Fundamentals

• Inherent vulnerability to exogenous shocks that have the potential to weaken its broad tourism sector.
• Weak system support, reflecting the policy and fiscal relationship with the federal government that is below the level assigned to U.S. states.
• The territory's financial position, which is improving but remains challenged by effects of the most recent pandemic-induced recession.
• Low reserves, which leaves the territory with minimal cushion should revenues underperform.
• Extremely weak debt and liability profile with the majority of its debt ratios already significantly high.