<PAGE>
MORGAN STANLEY
EMERGING MARKETS DEBT FUND, INC.
---------------------------------------------
OFFICERS AND DIRECTORS
Barton M. Biggs James W. Grisham
CHAIRMAN OF THE BOARD VICE PRESIDENT
OF DIRECTORS Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND DIRECTOR Joseph P. Stadler
John A. Levin VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
William G. Morton, Jr. SECRETARY
DIRECTOR Hilary D. Toole
Fergus Reid ASSISTANT SECRETARY
DIRECTOR James R. Rooney
Richard E. Salomon TREASURER
DIRECTOR Timothy F. Osborne
John H.T. Wilson ASSISTANT TREASURER
DIRECTOR
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INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
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ADMINISTRATOR
The United States Trust Company of New York
73 Tremont Street
Boston, Massachusetts 02108
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CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
The United States Trust Company of New York
770 Broadway
New York, New York 10003
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SHAREHOLDER SERVICING AGENT
The First National Bank of Boston
Investor Relations Department
P.O. Box 644, Mail Stop 46-02-09
Boston, Massachusetts 02102-0644
(617) 575-2900
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LEGAL COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
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INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
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[LOGO]
MORGAN STANLEY
EMERGING MARKETS
DEBT FUND, INC.
[LOGO]
FIRST QUARTER REPORT
MARCH 31, 1995
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- - -------
The Mexican peso devaluation of December 20, 1994 set the tone for emerging debt
and equity markets in the new year. The first quarter saw violent swings in
Brady bond prices in the developing countries. For the three-month period ended
March 31, 1995, the Fund had a total return based on net asset value per share
of -15.24% versus a return of -11.08% for the benchmark JP Morgan Emerging
Markets Bond Index (Index).
The Mexican financial crisis was brought about by a combination of economic,
financial and political factors. An excessive reliance on short-term debt linked
to the US dollar, current account deficits, an overvalued exchange rate, a loose
monetary policy, political and social tensions and a mismanaged devaluation
produced the financial crisis in Mexico, leading to withdrawals by foreign
investors and a run on the country's foreign exchange reserves. A lack of
refinancing alternatives in a hostile external environment drove fixed income
and equity prices down as Mexico sought funds from its partners in NAFTA and the
multilateral agencies in order to avoid rescheduling its liabilities.
Domestic political dynamics determined the price behavior of assets for much of
the quarter. President Clinton's bold move to bypass Congress by tapping into
the Exchange Stabilization Fund to provide Mexico with a potential US$ 20
billion in credits and/or guarantees was a turning point in the market's
evaluation of potential default risk. The market remained skeptical as the
Mexican government did not announce specific details about their revised
economic targets and measures to stabilize their economy in a post-devaluation
environment. It was not until March 9 that a comprehensive new economic program
was unveiled. March 9 also saw the low in the Index.
A high level of systemic risk in the market produced high volatility and
correlations across all emerging markets countries. The sell-off, at times
indiscriminate, created high correlations, thereby reducing the benefits of
diversification in fund portfolios. Reactions to political and economic news and
events during periods of falling liquidity caused price volatilities to remain
at the high end of their ranges. Constant re-valuation of default risk
exacerbated by poor technical conditions (such as the need of broker/dealers to
hedge illiquid Eurobond and local currency debt with liquid Brady bonds and the
unwinding of structured notes, as prices hit stop-loss levels) caused asset
prices to decline precipitously. We underestimated the herd instinct of
non-dedicated emerging markets funds to lighten up their positions in emerging
markets.
MEXICO
Fears of an unraveling of the economy and the financial system caused an exodus
of funds from Mexican assets. Local markets assets, Eurobonds and Brady bonds
were all hit. Some Mexican corporate valuations approached liquidation levels.
Price declines in the Brady bonds were about 30%. As the Mexican authorities
struggled to put together a comprehensive economic plan, the peso became the
barometer of sentiment. After the peso had devalued by about 70% in nominal
terms within a few weeks, we felt it was appropriate to add positions in several
types of Mexican assets: Brady bonds, sovereign Eurobonds, Tesobonos at yields
of 25-30% and short-term peso denominated paper (Cetes). These additions brought
our Mexican holdings at quarter-end to 18% of total investments.
BRAZIL
Brazil, the best performing country in 1994, has disappointed greatly in 1995.
Market expectations of rapid constitutional reform facilitating deregulation of
the economy, fiscal reform and faster privatization were dashed as the reform
process got bogged down in political gamesmanship and a perceived lack of
visible leadership in publicly shaping the agenda for reform. The Plan Real
succeeded in bringing down inflation, but a lack of progress on fiscal reform
left the strong nominal exchange rate to bear too heavy a burden of adjustment.
Deterioration in trade performance in the first quarter, on the back of a
booming economy, forced the economic team to rethink their strong exchange rate
policy and a confused attempt at a controlled devaluation added to the
uncertainty in the market.
2
<PAGE>
Revaluation of market expectations regarding the pace of reform and a market
adjustment to slightly higher inflation and weaker trade performance suggest
that asset prices will react positively to any incremental progress in the
reform process. Brazil retains the top weighting in our portfolio at 20%. We
look for a reversal in Brazil's relative underperformance for the first quarter.
ARGENTINA
Investors fearing a devaluation and/or sequestration of bank assets took capital
out of the banking system and the country on the heels of the Mexican debacle.
Although Argentina avoided the price declines in January, the straight jacket of
the Convertibility Plan brought about a severe contraction in domestic credit
following the capital flight. High interest rates and the drying up of liquidity
forced many banks and financial institutions, in an overbanked country, to
liquidate portfolios of liquid securities. Some were even suspended from the
clearing system and put into receivership. Finance Minister Cavallo attempted to
tackle the problem by addressing the growing deficit in the fiscal accounts by
cutting expenditures and raising revenues.
Price deflation, improvements in the trade accounts, an eventual return of
capital into the system, the strengthening of the political position of
President Menem in his attempts to further reform the remaining static elements
in the Argentine system and a decisive election victory are long-term positives
for Argentina. Price recovery from default levels has been swift and Argentina
was the best performer in March.
We added to our Argentine position during the broad market collapse. At 15% of
the total investments of the Fund, Argentina remains one of our top three
weightings. We anticipate a re-election of President Menem in May and a
continuation of the market-oriented policies under the leadership of Finance
Minister Cavallo.
VENEZUELA
Venezuelan bonds entered the quarter at already high yields. Its perceived
insularity from external shocks stemming from a high level of foreign reserves
and its cash flows from the oil sector attracted funds seeking refuge from the
"tequila effect." The domestic economy continues to suffer from high inflation
and low growth as the government has been unable to resolve the problem of
excessive liquidity which arose due to the bailout of the banking system.
Continued price and foreign exchange controls have limited investment and
growth. A lack of progress on the fiscal and monetary fronts could result in
further unraveling of the economy. The Venezuelan position has been reduced over
the quarter as funds have been added to Mexico.
OTHER
RUSSIAN Vnesheconombank loans have performed poorly for most of the quarter as
the market remains skeptical about Russia's intentions in moving forward on
re-negotiating its commercial bank debt. Additionally, President Yeltsin's
weakened commitment to reforms and the cost of the Chechnya conflict were
negative forces affecting market sentiment. On the positive side, the IMF
program to stabilize the ruble and the domestic economy should introduce an
element of discipline into domestic economic policy formation and performance.
Progress in negotiations with official creditors and commercial banks should
provide support to prices in the next quarter.
MOROCCO Tranche A loans lost about 13% over the quarter. 1994 will prove to be a
hard act to follow in terms of economic performance. A drought in 1995 could
result in lower growth, higher inflation and worsened foreign trade performance.
However, continued progress in privatization and a relatively modest external
debt burden should permit the country to fund emergency food imports to
alleviate the supply shock. We had 9% of the total investments of the Fund in
Morocco at quarter-end and look to gradually reduce the position on the asset's
strength.
ECUADOR is the latest entrant into the Brady club, having issued Brady bonds on
February 28, 1995. Competent handling of the exchange rate and monetary policy
at the time of the border conflict
3
<PAGE>
with Peru improved the market's perception of economic policy-making in the
country. Decisive actions to restore fiscal equilibrium aided by buoyant oil
prices and potential privatization revenues should attract investment in their
bonds.
We expect PANAMA to be the next Brady country, and anticipate bonds to be issued
before the end of 1995. We continue to hold 5% in Panamanian non-performing
loans.
MARKET OUTLOOK
The first quarter crash has sobered both policy-makers and investors in emerging
markets. The central lesson learned from December 20, 1994 was that the market
will exact a severe penalty upon countries which stray from prudent, balanced
macroeconomic policies. We are impressed with the steps taken by other
countries, most notably Argentina, in immediate response to the Mexican crisis.
We believe the long-term fundamentals of emerging markets are intact, the past
three months have instilled discipline and valuations are most compelling.
Sincerely,
[SIG]
Barton M. Biggs
CHAIRMAN
[SIG]
Paul Ghaffari
PORTFOLIO MANAGER
April 20, 1995
4
<PAGE>
INVESTMENTS (UNAUDITED)
(Showing Percentage of Total Value of Investments)
- - ----------
MARCH 31, 1995
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- - ---------------------------------------------------------
- - ------------
<C> <S> <C> <C>
DEBT INSTRUMENTS (87.7%)
- - --------------------------------------------------------------
- - -------------
ALGERIA (2.4%)
LOAN AGREEMENTS
+++ Algeria Loan Agreement 1989
7.625%, 12/31/96 FRF 27,830 U.S.$ 1,383
+++ Algeria Reprofiled Loan
Agreement 'A' 1992 8.3125%,
12/31/00 U.S.$ 10,220 2,810
-------------
4,193
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- - --------------------------------------------------------------
- - -------------
ARGENTINA (15.4%)
BONDS
Compania Austral de
Inversiones (Convertible)
7.00%, 3/7/96 U.S.$ 1,000 1,249
+++ Republic of Argentina 'L'
7.3125%, 3/31/05 35,450 19,232
Republic of Argentina Local
Markets Trust 13.375%,
8/15/01 8,760 6,110
-------------
26,591
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- - --------------------------------------------------------------
- - -------------
BRAZIL (20.1%)
BONDS
+++ Federative Republic of Brazil
'C' Bond 8.00%, 4/15/14 PIK U.S.$17,978 6,696
+++ Federative Republic of Brazil
'C' Bond "Euro" 8.00%,
4/15/14 PIK 39,984 14,894
+++ Federative Republic of Brazil
New Money Bond 6.75%,
4/15/09 17,750 8,032
+++ Federative Republic of Brazil
Par Bond 'Y3' 6.6875%,
4/15/24 14,250 5,166
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34,788
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- - --------------------------------------------------------------
- - -------------
BULGARIA (3.5%)
BONDS
+++ The Republic of Bulgaria
Discount Bond 'A' 7.5625%,
7/28/24 U.S.$ 3,549 1,517
+++ The Republic of Bulgaria
Discount Bond 'A' "Euro"
7.5625%, 7/28/24 2,000 855
+++ The Republic of Bulgaria
Discount Bond 'B' 8.0625%,
7/28/24 880 376
+++ The Republic of Bulgaria
Interest Arrears Bond
7.5625%, 7/28/11 3,024 1,036
+++ The Republic of Bulgaria
Interest Arrears Bond "Euro"
7.5625%, 7/28/11 6,648 2,277
-------------
6,061
-------------
</TABLE>
- - -----------------------------------------------------------------
- - -------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- - --------------------------------------------------------------
- - -------------
<C> <S> <C> <C>
ECUADOR (3.4%)
BONDS
+++ Republic of Ecuador Discount
Bond 7.25%, 2/28/25 U.S.$ 7,792 U.S.$ 3,526
+++ Republic of Ecuador Eligible
Interest Bond 7.6875%,
12/21/04 706 349
+++ Republic of Ecuador Par Bond
3.00%, 2/28/25 65 18
+++ Republic of Ecuador Past Due
Interest Bond 7.25%, 2/27/15 9,041 2,079
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5,972
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- - --------------------------------------------------------------
- - -------------
INDIA (1.7%)
BOND
Saurashtra Cement Co. 17.00%,
11/27/98 INR 940 2,992
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- - --------------------------------------------------------------
- - -------------
INDONESIA (0.9%)
BOND
Polysindo Eka Perkasa 13.00%,
6/15/01 U.S.$ 1,600 1,472
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- - --------------------------------------------------------------
- - -------------
MEXICO (5.8%)
BOND
Petroleos Mexicanos 8.625%,
12/1/23 U.S.$ 14,700 7,276
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LOAN AGREEMENTS
+++ United Mexican States Multi-
Year Refinancing Agreement
7.125%, 12/31/06 1,991 1,080
+++ United Mexican States Old New
Money Loans 7.4125% -
7.625%, 3/20/05 3,207 1,740
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2,820
-------------
10,096
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- - --------------------------------------------------------------
- - -------------
MOROCCO (8.8%)
LOAN AGREEMENTS
+++ Kingdom of Morocco
Restructuring and
Consolidation Agreement `A'
1990 8.5175%, 12/31/00
(Participation: Salomon
Brothers) JPY 792,741 4,473
+++ Kingdom of Morocco
Restructuring and
Consolidation Agreement 'A'
1990 7.375%, 1/1/09
(Participation: Goldman
Sachs, JP Morgan, Salomon
Brothers) U.S.$ 18,500 10,822
-------------
15,295
-------------
</TABLE>
- - -----------------------------------------------------------------
- - -------------
5
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- - --------------------------------------------------------------
- - -------------
<C> <S> <C> <C>
NIGERIA (3.5%)
BOND
Central Bank of Nigeria Par
Bond 6.25%, 11/15/20
(including 13,750 warrants) U.S.$ 8,000 U.S.$ 3,060
-------------
LOAN AGREEMENT
Central Bank of Nigeria
Promissory Note 8.00%
annuity, 1/5/10 11,000 2,970
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6,030
-------------
- - --------------------------------------------------------------
- - -------------
PANAMA (4.8%)
LOAN AGREEMENTS
Republic of Panama Refinanced
Loan Agreement, 9/30/97 U.S.$ 1,000 395
Republic of Panama
Unrestructured Loans 19,900 7,861
-------------
8,256
-------------
- - --------------------------------------------------------------
- - -------------
PERU (0.6%)
LOAN AGREEMENT
Republic of Peru - Petroperu
Working Capital Loan U.S.$ 2,000 980
-------------
- - --------------------------------------------------------------
- - -------------
POLAND (2.4%)
BOND
+++ The Polish People's Republic
Past
Due Interest Bond 3.25%,
10/27/14 U.S.$ 10,325 4,156
-------------
- - --------------------------------------------------------------
- - -------------
RUSSIA (4.7%)
LOAN AGREEMENTS
Bank for Foreign Economic
Affairs U.S.$ 35,000 7,962
Bank for Foreign Economic
Affairs 'C' DEM 1,000 165
-------------
8,127
-------------
- - --------------------------------------------------------------
- - -------------
VENEZUELA (9.7%)
BONDS
+++ Republic of Venezuela Debt
Conversion Bond 'DL'
7.6875%, 12/18/07 U.S.$ 16,500 6,971
+++ Republic of Venezuela Front-
Loaded Interest Reduction
Bond `A' 8.875%, 3/31/07 15,500 6,587
+++ Republic of Venezuela Front-
Loaded Interest Reduction
Bond `B' 8.875%, 3/31/07 7,500 3,188
-------------
16,746
-------------
- - --------------------------------------------------------------
- - -------------
TOTAL DEBT INSTRUMENTS
(Cost U.S.$183,255) 151,755
-------------
</TABLE>
- - -----------------------------------------------------------------
- - -------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- - --------------------------------------------------------------
- - -------------
<C> <S> <C> <C>
SHORT TERM INVESTMENTS (12.2%)
- - --------------------------------------------------------------
- - -------------
MEXICO (11.8%)
MEXICAN CETES
5/18/95 MXN 12,670 U.S.$ 1,689
6/1/95 11,944 1,550
7/6/95 5,872 714
8/3/95 6,130 710
8/17/95 19,677 2,218
8/24/95 21,750 2,432
8/31/95 3,675 406
2/22/96 12,093 1,040
-------------
10,759
-------------
MEXICAN TESOBONOS
7/27/95 U.S.$ 1,100 993
9/7/95 10,000 8,721
-------------
9,714
-------------
20,473
-------------
- - --------------------------------------------------------------
- - -------------
UNITED STATES (0.4%)
REPURCHASE AGREEMENT
U.S. Trust, 6.00%, dated
3/31/95, due 4/3/95, to be
repurchased at U.S. $750,
collateralized by U.S. $710
Government National Mortgage
Association 9.50% to 10.00%,
due 12/15/09 to 1/15/10,
valued at U.S. $764 U.S.$ 750 750
-------------
- - --------------------------------------------------------------
- - -------------
TOTAL SHORT TERM INVESTMENTS
(Cost U.S.$24,132) 21,223
-------------
- - --------------------------------------------------------------
- - -------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (0.1%)
French Franc FRF 353 73
Indian Rupee INR 2,417 77
Japanese Yen JPY 61 1
-------------
(Cost U.S.$145) 151
-------------
- - --------------------------------------------------------------
- - -------------
TOTAL INVESTMENTS (100.0%)
(Cost U.S.$207,532) 173,129
-------------
- - --------------------------------------------------------------
- - -------------
OTHER ASSETS AND LIABILITIES
Other Assets U.S.$ 17,627
Liabilities (30,150) (12,523)
------------ -------------
- - --------------------------------------------------------------
- - -------------
NET ASSETS
Applicable to 16,055,620 issued and
outstanding U.S.$.01 par value shares
(100,000,000 shares authorized) U.S.$ 160,606
-------------
- - --------------------------------------------------------------
- - -------------
NET ASSET VALUE PER SHARE
U.S.$ 10.00
-------------
- - --------------------------------------------------------------
- - -------------
<FN>
+++ Variable/floating rate or step coupon security - rate
disclosed is as of March 31, 1995
PIK--Payment-in-Kind
DEM--German Deutsche Mark
MXN--Mexican New Peso
</TABLE>
6
