South Korea may have to offer steep discounts to sell key state assets such as bank stakes, to help cut a growing fiscal deficit, while pumping money into the economy to pull it safely out of a global downturn.
The alternative is more delays, but the desperation for funds may be enough to override government fears of criticism for selling state assets on the cheap.
The government will be more flexible, shifting away from its previous stance that it won't sell the stake below a certain price. That could mean a big discount, said one fund manager at a domestic asset management firm, asking not to be named because he is not authorized to talk to the media.
He was referring specifically to Woori Finance Holdings, which could be among the first to be offered and which has been in government hands since it was bailed out during the Asian financial crisis a decade ago.
The government wants to sell an initial 7 percent in South Korea's third-ranked bank, worth $800 million at current market prices.
It is also selecting an adviser for the sale of 49 percent in Incheon International Airport, the main gateway to South Korea, in a deal worth an estimated $2 billion.
The offerings come as South Korea seeks fresh revenue after record spending to stimulate the economy over the past year has sapped state coffers, and as it tries to create more jobs. The government expects the 2009 fiscal deficit to be 5.0 percent of the nation's gross domestic product.
But scaled back lending by banks and concerns about a slowing global economic recovery may reduce appetite for state assets, and some bankers say that could well mean some delays.
Concern about selling strategic assets to foreign investors could also be a barrier in some cases.
There seems to be resistance to sell part of such infrastructure assets to foreign capital, considering those companies are not in financial difficulty, said Kim Sun-bin, a chief researcher at Samsung Economic Research Institute.
That will be the hottest issue going forward.
In a similar move, India's government plans to list some profitable state firms as Asia's third-largest economy seeks to fuel growth without further widening a large fiscal deficit.
For foreign strategic buyers eyeing South Korea, the absence of management rights for the assets will make them less attractive. National security concerns could be another stumbling block.
I doubt if the sale process will be able to proceed, considering market liquidity conditions, said one M&A banker at a top local brokerage, asking not to be named because of the sensitivity of the issue.
Daewoo Engineering's case indicates the current market situation, with companies not ready to initiate active investments, he said.
The auction for a majority of Daewoo Engineering & Construction Co Ltd, in a deal estimated at $3 billion, has drawn just three foreign investors after the sole local bidder, private equity firm MBK Partners, dropped out.
Australia's Macquarie is tipped as a possible foreign bidder for some government assets, given its track record in infrastructure deals. It declined to comment.
President Lee Myung-bak, who won office almost two years ago, had made privatizing state-run institutions a centerpiece of his pro-business policy agenda, though this was put on hold after his popularity sank in a row over U.S. beef imports.
Some analysts said the government may now be tempted to try selling stakes as South Korea looks set to be among the first economies to recover from the downturn and with the local stock market up 40 percent so far this year.
With more state assets in the pipeline, including KDB Financial Group, the parent of Korea Development Bank, and stakes in Industrial Bank of Korea, the government may have little option but to opt for current market prices rather than hold out for the possibility of more later.
We plan to speed up the process now that market conditions have been improving, said one finance ministry official overseeing the sale plans.
Timing will depend on market conditions, but there is no change to the deadline, he said, referring to a 2012 timeline by which the government hopes to sell stakes in 112 state assets and raise about 4.6 trillion won ($3.97 billion).