The attractions, as well as the obstacles, to investment in the Gulf at the moment are legion. Gross domestic product (GDP) in the Gulf states grew by an average of some 9 per cent in 2003 and is set for another robust performance in 2004. High oil prices are fuelling the boom - no bad thing, in spite of the hand-wringing over such dependence, since fears of a capacity crunch and roaring demand growth are likely to keep the price above $30 a barrel throughout 2005. The soaring revenues have not trickled but flooded down into the private sector, driving strong non-oil growth across the region and pushing stock markets to ever-greater highs.

The latest HSBC-MEED Middle East Business Confidence Survey (MEBCS), conducted by YouGov, illustrates that the majority of international companies active in the region expect the trend of rising business volumes to be maintained into 2005 (see figures 4 and 5).

And GCC leaders are paying more than lip service to the desire to attract FDI into their economies, as diversification, job creation and fiscal management needs dictate. No one is under any illusions that the oil price windfall can or should be relied on in the years and decades to come.

Governments can justifiably point to significant signs of progress in liberalisation - the sale of new mobile licences everywhere but Qatar and the UAE, the sweeping conversion to private power, the opening of the banking sector in Kuwait, laws in Bahrain, Dubai and most recently Oman permitting foreign freehold ownership of property, or the admission of foreigners to the Doha Securities Market. A string of privatisations and initial public offerings (IPOs) are opening up the shareholding structures of formerly state-owned companies such as Saudi Arabia's National Company for Co-operative Insurance, Abu Dhabi's General Holding Company and state telcos in Bahrain and Oman.

But the conversion to the merits of privatisation and liberalisation is having little impact on the scale of international involvement in the Gulf's largest economies (see figures 6-9). In 2003, FDI amounted to a mere 4.4 per cent of GDP in the UAE and 12.1 per cent in Saudi Arabia - both registering a year-on-year decrease. In Kuwait, the region's least friendly investment climate, the figure was a mere 1.2 per cent. Notably the region's poorer and less hydrocarbons-rich economies put in better showings, with Bahrain in a different league at 72.4 per cent of GDP and Oman at 12.6 per cent, while the sheer speed of Qatar's gas-led growth created a relatively wider opening for foreigners, who contributed about 16 per cent of GDP.

So why the hesitancy of hungry international investors to jump on the GCC bandwagon, which would appear to offer far juicier returns than many more popular regions? One reason is that alternative destinations do not come saddled with the baggage of political instability and terrorism that burdens the Middle East. In the MEBCS, respondents acknowledged that the perceived threat of terrorism had provoked some strategic rethinking, although the impact has been limited on existing investors in the region (see box).

From an economic angle, as is impli