AS Middle East economies open up to capital flows from the rest of the world, growing numbers of governments and companies are thinking about raising money on the global debt and equity markets. In the process, they have found a new group of friends who are more than happy to help them out - the international investment banks.

The Arab world is one of the last regions to be labelled as an emerging market by Western banks and fund managers. The recent blossoming of the capital markets began about four years ago with a $400 million Eurobond issued by the Lebanese government. These days, hardly a month goes by without a debt issue from a bank in Beirut or a global share offering by a newly-privatised Egyptian company, and many of investment banking's most prestigious names are busily courting prospective clients. 'There must be an investment banker on every flight to Cairo nowadays,' notes one Western financier.

Some advisory mandates are starting to pop up here and there, and many banks are becoming active investors in Middle East stock markets, but the eye-catching events have been in debt and equity issuance. On the debt side, Morocco, Tunisia, Lebanon and Oman have all issued sovereign bonds and Egypt and Jordan are expected to follow suit in the coming months. Several banks and industrial projects have also visited the bond markets in the last year. On the equity side, the first Arab global depositary receipt (GDR) issue came from Lebanon's Banque Audi in 1995, lead-managed by Robert Fleming of the UK. Since then about a dozen banks and companies, mostly Egyptian, have issued GDRs.

The recent string of securities issues has come about because of the coincidence of two trends. The first is the prolonged period of low interest rates in the West which has already sent investors into Asia and Latin America in search of higher yields and is now bringing them to the Middle East. The second reason is the growing demand from the region itself for private capital, as governments try to cut back budget deficits and swap the old orthodoxy of state-controlled development for the new one of free markets and growth led by the private sector.

A look at the growing number of Arab states with investment-grade credit ratings suggests a third reason - that investors perceive the Middle East as being politically more stable than it was only a few years ago. The two Gulf wars of 1981-88 and 1991 are a distant memory and Islamist opposition movements are not the bogeymen they once were. The Arab-Israeli peace process may be in trouble, but investors these days are less worried that its problems will destabilise the whole region. Arab governments are also seen as relatively responsible compared to some elsewhere in the developing world. 'In Latin America and the Far East you're making a bet on fiscal and political rectitude,' says one executive at a Western bank. 'In the Middle East that's not really a problem. What you're worried about is some crazy, unpredictable event like another adventure by Iraq or instability in Saudi Arabia.'

The single biggest capital markets issue from the Arab world was the $1,200 million Rasgas bond in Qatar, arranged by Goldman Sachs and CS First Boston in January of this year. This deal is regarded by many bankers as ground-breaking because of its large size and because it was part of a project financing which was not backed by guarantees from the Qatari government. However, the bank which has led the greatest number of issues is Japan's Nikko Securities. Nikko has placed a series of Tunisian yen bonds in the Japanese market but rarely surfaces anywhere else in the Arab world.

Next is probably Merrill Lynch, which led Lebanon's debut Eurobond in 1994 and has won the lion's share of debt mandates from that country since then, as well as leading a global equity issue for the company rebuilding central Beirut, Solidere. 'We've had an office there since 1963 and it never, never closed. In the darkest days of the civil war when hostages were being taken and the US embassy was bombed, we were there,' proclaims Paul Raphael, who heads Merrill Lynch's investment banking team in the Middle East. He shrugs off the suggestion, sometimes made by competitors, that Merrill's success in winning deals is connected to the fact that Lebanon's central bank governor used to work for the company. 'Everybody thinks it's Riad Salameh. I'd say he had a role in getting them comfortable with our first mandate, but the Central Bank has zero role in awarding mandates. It's the finance ministry which does that.' Lebanon has started to bring a wider range of banks to its deals, a trend which Raphael expects to continue. 'As they mature in their borrowing they'll want to develop three to five solid relationships, like any other sovereign.'

Measured by the pattern of mandates, banks seem to have particular strengths in different countries and markets. These are not static, however. Nomura and ING Barings, both more prominent to date in equity than in debt, have been stronger around the Mediterranean - as has France's Banque Paribas - but are now branching out into the Arabian peninsula. The UK's HSBC, which has an extensive commercial banking operation in the Arab world, has hitherto been more of an equity arranger, but just led the first Eurobond from a Jordanian company. Salomon Brothers has been active in Egypt among other places, though it has yet to lead a major deal. The Gulf is mainly the province of American heavyweights like Chase Manhattan, JP Morgan and Goldman Sachs or ex-Americans like CS First Boston, which is part of the Credit Suisse group.

Bankers say that the competition in the Middle East can be divided roughly into two categories. The first consists of banks with a regional branch network that can offer everything to their clients from commercial banking to corporate finance and asset management - banks like Chase Manhattan, Citibank, HSBC and Credit Suisse would fall into this group. The second category is of banks which work out of London or New York and chase deals on a more opportunistic basis. Most of these have about half a dozen staff dedicated to the Middle East in corporate finance, sales and research, with more brought in from other areas when needed. Several teams are headed by an Arab executive from North Africa or Lebanon. It is fair to say that the region has not been so eagerly courted by investment banks for 20 years, since the heady days when petrodollars poured out of the Arab world in a seemingly unending stream.

Several banks have opted to build a ground base in the Middle East. One is the UK equity house, Robert Fleming Holdings, which led the Banque Audi GDR in Lebanon. The bank has not been prominent in primary issuance since then, though a mandate to raise another $75 million in equity for the Lebanese bank should put it back on the map. Flemings' regional head of sales, Dominic Hughes, says the bank is concentrating on building up a profitable equity brokerage business, and is planning to create a presence in Egypt as part of this strategy. Flemings has not decided whether to open an office or go into partnership with a local brokerage. ING Barings, which has been involved in most of the GDR issues from Egypt, has already bought an undisclosed shareholding in Cairo brokerage Intercapital. 'It's not our usual practice to enter a joint venture,' says Barings director Angus Blair, who adds that what attracted his bank in this case was the quality of the company's staff and shareholders, which include a leading local investment bank. 'We intend to build on and consolidate the name that we have in the market.' Barings has been in the Middle East on and off since the late 18th century and before the latest wave of issues, its last mandate was an Iraqi government bond in 1938.

Another bank with a similar plan is Morgan Stanley Dean Witter of the US, which has bought into a financial services company run by an Egyptian who used to work for the bank, Hussein Choucri. 'This is not only going to be a domestic but also a regional play for us,' says Jameel Akhrass, an executive director at Morgan Stanley in London. 'It's an equity investment, but with an eye to the future. [Choucri] could at some point play a role in executing deals for us.' Morgan Stanley is teaming up with Goldman Sachs to co-lead a $400 million bond issue for Tunisia in September, with Merrill Lynch as lead-manager. Akhrass says his bank is also looking at opportunities in the Gulf.

There are cynics who wonder whether the current rate of bond and GDR issuance is driven by the best interests of borrowers or by the banks' hunger for fees. On balance, the general arguments in favour of Arab institutions issuing bonds or GDRs seem weightier than the arguments against (see box), though some bankers suggest that a 'me too' factor plays its part in the decision of some companies to tap the international markets. On the question of whether issuers get good value for the money they spend on international deals, most bankers say they are not losing out. 'The Middle East is not being ripped off by any stretch of the imagination,' says a European banker. 'We'd like to make a lot more than we do.' There is little love lost between the dozen-odd banks in the market, and there are bankers who privately accuse competitors of doing deals at very low margins in order to gain market share. 'It's a very, very vicious business,' says another banker.

Commission rates vary widely from country to country. In Egypt, for example, the first GDR was done at 3.5 per cent, but bankers say fees have now come down to 2.5 per cent, compared to 5-7 per cent in the US, where the market is dominated by half a dozen firms. In the Gulf, commissions vary a lot. One reason why Saudi borrowers tend to ignore the bond markets is that they can now get very favourable pricing on syndicated loans. 'Middle East fees are all over the place and there isn't a trend,' says a London-based banker. 'Anyone who knows anything, knows that you don't sell suits by different designers for the same price.' What seems clear is that Middle East institutions have got a taste for international finance and barring some political hiccup, the current trickle of issues will probably swell into a stream before too long.