Other investment flows have also fallen sharply as global banks reduced the size of their balance sheets after dramatic expansion of their crossborder activities during the pre-crisis boom. On the other hand, foreign direct investment (FDI) flows had actually increased slightly relative to the pre-crisis period. The same notion holds for the region as well. Financial flows from the region have been much weaker since the global financial crisis. In particular, other investment inflows have fallen sharply and turn into small outflows due to the process of deleveraging. Foreign direct investment (FDI) inflows also experienced slowdown, however the role of the direct investments in some countries is still strong as they were still going through the "expansion phase" when it comes to this type of flows. Portfolio debt flows have increased, reflecting a combination of factors, but mostly as a result of government borrowing abroad by issuing government bonds. 11  Chart 8 Financial flows and their structure  Source: IMF BOP data. Financial integration in emerging market and developing economies has risen substantially over the past two decades, delivering benefits but also posing new challenges. Guarding against a sudden stop or external crisis requires carefully monitoring of different aspects of flow and stock imbalances. Although it seems that flow imbalances narrowed in the region, for completing the picture it is essential to observe the stock positions, as well.
The magnitude, composition, speed, form of financing and focus of these reconstruction expenditures can have substantial effects on the baseline scenario in terms of output,  BIS Review 61/2010  5  inflation and the performance of financial markets. There are also risks associated with the time that it will take for productive activities to return to normal and for agents to materialize their expenditures. This has a direct incidence on the assessment of the immediate effects of the catastrophe in the first and second quarters. In any case, this risk is partly mitigated when considering that before the earthquake and tsunami, domestic output and demand were already showing a higher velocity than had been forecast. The external scenario shows a better outlook, although some risks persist. The fiscal situation of developed economies – especially in some European countries – is cause for concern because of its effects on the perception of risks and on the financial system, and its possible implications on the path of recovery of global growth. There are also risks associated with the administration of monetary stimulus packages, either if they are withdrawn sooner than necessary – considering that some countries’ financial systems remain weak – or later than advisable. As usual, the persistence of global imbalances entails risks because of both strong capital inflows to emerging economies and significant changes in the evolution of currency parities. The realization of some of these risk scenarios will have direct consequences on the country’s growth and inflation forecasts.