<PAGE>
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THE
MALAYSIA FUND,
INC.
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THIRD QUARTER REPORT
SEPTEMBER 30, 1998
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
THE MALAYSIA FUND, INC.
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DIRECTORS AND OFFICERS
Barton M. Biggs
CHAIRMAN OF THE BOARD
OF DIRECTORS
Michael F. Klein
PRESIDENT AND DIRECTOR
Peter J. Chase
DIRECTOR
John W. Croghan
DIRECTOR
David B. Gill
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
Dato Malek Merican
DIRECTOR
William G. Morton, Jr.
DIRECTOR
Stefanie V. Chang
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
TREASURER
Belinda A. Brady
ASSISTANT TREASURER
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U.S. INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
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MALAYSIAN INVESTMENT ADVISER
Arab-Malaysian Consultant Sdn Bhd
21st-29th Floors, Bangurian Arab-Malaysian
Jalan Raja Chulan, 5200 Kuala Lampur, Malaysia
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ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
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CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
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SHAREHOLDER SERVICING AGENT
Boston Equiserve
Investor Relations Department
P.O. Box 644
Boston, Massachusetts 02102-0644
(800) 730-6001
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LEGAL COUNSEL
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
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INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
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For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.
<PAGE>
LETTER TO SHAREHOLDERS
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For the nine months ended September 30, 1998, The Malaysia Fund, Inc. (the
"Fund") had a total return, based on net asset value per share, of -55.83%
compared to -36.01% for the U.S. dollar adjusted Kuala Lumpur Stock Exchange
Composite Index (the "Index"). The Fund's relative performance was adversely
affected by its decision, discussed below, to "fair value" its Malaysian assets
commencing in September. For the one year ended September 30, 1998 and for the
period since the Fund's commencement of operations on May 4, 1987 through
September 30, 1998, the Fund's total return, based on net asset value per share,
was -73.21% and -62.55%, respectively, compared to -60.89% and -37.80%,
respectively, for the Index. On September 30, 1998, the closing price of the
Fund's shares on the New York Stock Exchange was $3 3/8, representing a 54.3%
premium to the Fund's net asset value per share.
The Malaysian market was negatively affected during the third quarter by the
government's decision to implement capital controls on September 1, 1998. The
controls were imposed to maintain the value of the ringgit while expansionary
monetary and fiscal policies were adopted. The economy has been contracting for
several quarters. The government feared that the ringgit would fall further if
it were allowed to trade freely. Monetary policy has subsequently been eased
dramatically while deficit spending increased to fund infrastructure projects,
social spending and a partial financial system bailout. These policies combined
with recent political changes increase the risk of capital flight in Malaysia,
which has a very open economy with trade greater than 150% of gross domestic
product. Ironically, Malaysia cut itself from the international capital markets
just before pressures eased, allowing neighboring countries to cut interest
rates and increase deficit spending significantly.
Economic statistics remain discouraging with poor releases of data covering
industrial production, exports and imports. However, the government's fiscal
and monetary stimulus packages should lead to some improvement. The political
situation has also remained unsettled following the August resignation of Deputy
Prime Minister Anwar Ibrahim and his subsequent trial on a variety of charges.
The aforementioned capital controls prohibit the repatriation of foreign
portfolio capital for at least one year and impose a fixed foreign exchange
rate. In addition, new reporting requirements and other restrictions have
hampered the ability of foreign investors to trade Malaysian stocks. The
capital controls led Morgan Stanley Capital International (MSCI) to drop
Malaysia from its developed and emerging market free indices, which are widely
used to benchmark performance effective November 30, 1998. If current policies
remain in place, there is a risk that a sizable sum of foreign capital will
attempt to exit the country next September. In light of the effect of the new
restrictions and requirements on the Malaysian market, in early September the
Fund, under fair value procedures established by the Board of Directors, began
to discount the value of its Malaysian assets because it was of the view that
use of market prices and the official ringgit/U.S. dollar exchange rate did not
properly reflect the U.S. dollar value of such assets. The extent of the
discount implied by the Fund's valuation may change from time to time with
changes in market conditions. As a result of these events, we have concentrated
the portfolio in the highest quality Malaysian stocks, including stocks with
significant dividend yields as dividends are convertible into dollars.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
October 1998
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED.
2
<PAGE>
The Malaysia Fund, Inc.
Investment Summary as of September 30, 1998 (Unaudited)
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HISTORICAL
INFORMATION
<TABLE>
<CAPTION>
TOTAL RETURN (%)
--------------------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
-------------------------- ------------------------- -------------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year to date -48.03% -- -55.83% -- -36.01% --
One Year -66.11 -66.11% -73.21 -73.21% -60.89 -60.89%
Five Year -75.12+ -24.29+ -84.03+ -30.71+ -70.72 -21.78
Ten Year -6.43+ -0.71+ -53.11+ -7.29+ -22.14 -2.47
Since Inception* -42.29+ -4.75+ -62.55+ -8.24+ -37.80 -4.08
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
ENDED
SEPTEMBER 30,
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share. $ 8.98 $13.77 $12.41 $13.55 $16.28 $27.32 $18.57 $18.58 $19.29 $ 5.04 $ 2.19
Market Value Per Share . . $ 7.50 $18.75 $11.38 $11.75 $16.25 $28.00 $17.38 $17.00 $17.50 $ 6.56 $ 3.38
Premium/(Discount) . . . . -16.5% 36.2% -8.3% -13.3% -0.2% 2.5% -6.4% -8.5% -9.3% 30.2% 54.3%
Income Dividends . . . . . $ 0.17 $ 0.11 $ 0.21 $ 0.07 -- $ 0.16 $ 0.02 -- -- -- $ 0.03
Capital Gains Distributions -- -- -- -- -- $ 1.13 $ 3.59 $ 0.84 $ 2.82 $ 0.51 --
Fund Total Return (2). . . 23.32% 54.57% -8.35% 9.80% 20.15% 98.28%+ -18.87% 4.33% 19.93% -72.89% -55.83%
Index Total Return (3) . . 25.73% 57.91% -10.02% 9.13% 20.19% 92.60% -19.66% 3.05% 25.12% -68.71% -36.01%
</TABLE>
(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
(3) The U.S. dollar adjusted Kuala Lumpur Stock Exchange (KLSE) Composite Index
is a broad based capitalization weighted index of 100 stocks listed on the
exchange, including dividends.
* The Fund commenced operations on May 4, 1987.
+ This return does not include the effect of the rights issued in connection
with the Fund's 1993 rights offering.
3
<PAGE>
The Malaysia Fund, Inc.
Investment Summary as of September 30, 1998 (Unaudited)
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DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Short-Term Investments (4.8%)
Equity Securities (95.2%)
</TABLE>
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SECTORS
[CHART]
<TABLE>
<S> <C>
Miscellaneous Materials & Commodities (19.1%)
Telecommunications (6.9%)
Transportation--Shipping (6.5%)
Utilities--Electric & Gas (13.0%)
Other (6.2%)
Automobiles (4.3%)
Beverages & Tobacco (14.3%)
Broadcasting & Publishing (6.1%)
Energy Sources (8.50%)
Food & HouseholdProducts (6.6%)
Leisure & Tourism (8.5%)
</TABLE>
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TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
Percent of
Net Assets
----------
<S> <C>
1. Tenaga Nasional Bhd 7.7%
2. Telekom (Malaysia) Bhd 6.9
3. Malaysian International Shipping Bhd 6.5
4. Hap Seng Consolidated Bhd 6.2
5. Petronas Gas Bhd 6.2
6. Rothmans of Pall Mall Bhd 5.2
7. Nestle Bhd 5.2
8. Genting Bhd 4.9
9. Star Publications (Malaysia) 4.4
10. Kuala Lumpur Kepong Bhd 4.2
----
57.4%
----
----
</TABLE>
* Excludes short-term investments.
4
<PAGE>
FINANCIAL STATEMENTS
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STATEMENT OF NET ASSETS (UNAUDITED)
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SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
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MALAYSIAN COMMON STOCKS (107.0%)
(Unless otherwise noted)
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AUTOMOBILES (4.3%)
Oriental Holdings Bhd 210,000 U.S.$ 201
Tan Chong Motor Holdings Bhd 3,697,000 709
910
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BANKING (3.2%)
Malayan Banking Bhd 735,000 689
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BEVERAGES & TOBACCO (14.3%)
Carlsberg Brewery (Malaysia) Bhd 415,000 810
Guinness Anchor Bhd 967,000 635
R.J. Reynolds Bhd 720,500 498
Rothmans of Pall Mall Bhd 283,000 1,105
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3,048
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BROADCASTING & PUBLISHING (6.1%)
Nanyang Press Bhd 496,000 364
Star Publications (Malaysia) 934,000 938
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1,302
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ELECTRICAL & ELECTRONICS (0.9%)
Malaysian Pacific Industries Bhd 200,000 180
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ENERGY SOURCES (8.5%)
Petronas Gas Bhd 856,000 1,315
Shell Refining Co. Bhd 574,000 500
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1,815
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FOOD & HOUSEHOLD PRODUCTS (6.6%)
Nestle Bhd 340,000 1,101
Yeo Hiap Seng (Malaysia) Bhd 649,000 300
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1,401
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LEISURE & TOURISM (8.5%)
Genting Bhd 624,200 1,048
Tanjong plc 870,000 770
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1,818
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MISCELLANEOUS MATERIALS & COMMODITIES (19.1%)
Austral Enterprises Bhd 840,000 624
Golden Hope Plantations Bhd 1,017,000 574
Hap Seng Consolidated Bhd 2,547,000 1,334
IOI Corporation Bhd 1,896,000 641
Kuala Lumpur Kepong Bhd 887,000 900
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4,073
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MULTI-INDUSTRY (2.9%)
Sime Darby Bhd 1,031,400 624
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REAL ESTATE (2.9%)
Selangor Properties Bhd 1,351,000 U.S.$ 431
Tan & Tan Development Bhd 764,000 187
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618
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RECREATION -- OTHER CONSUMER GOODS (3.3%)
Amway (Malaysia) Holdings Bhd 485,000 699
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TELECOMMUNICATIONS (6.9%)
Telekom Malaysia Bhd 1,029,000 1,470
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TRANSPORTATION -- SHIPPING (6.5%)
Malaysian International Shipping Bhd 1,131,000 1,387
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UTILITIES -- ELECTRICAL & GAS (13.0%)
Puncak Niaga Holding Bhd 1,134,000 505
Tenaga Nasional Bhd 1,889,000 1,646
YTL Power International Bhd 907,000 626
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2,777
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TOTAL COMMON STOCKS
(Cost U.S.$40,477) 22,811
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<CAPTION>
FACE
AMOUNT
(000)
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<S> <C> <C>
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (5.3%)
Hong Kong Dollar HKD 1 -- @
Malaysian Ringgit MYR 4,794 1,141
-----------
(Cost U.S.$1,154) 1,141
-----------
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TOTAL INVESTMENTS (112.3%)
(Cost U.S.$41,631) 23,952
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OTHER ASSETS AND LIABILITIES (-12.3%)
Other Assets U.S.$ 3,307
Liabilities (5,937) (2,630)
-------------- ---------------
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NET ASSETS (100%)
Applicable to 9,732,966 issued and
outstanding U.S.$0.01 par value shares
(20,000,000 shares authorized) U.S.$ 21,322
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NET ASSET VALUE PER SHARE U.S.$ 2.19
---------------
---------------
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</TABLE>
As discussed in the shareholder letter, the Fund's Malaysian assets have been
fair valued pursuant to procedures approved by the Board of Directors.
@ -- Value is less than U.S.$500.
NOTE: Prior government approval for foreign investments may be required under
certain circumstances in some emerging markets, and foreign ownership
limitations may also be imposed by the charters of individual companies in
emerging markets. As a result, an additional class of shares designated as
"foreign" may be created and offered for investment. The "local" and "foreign"
shares' market values may vary.
5
