<PAGE>
MORGAN STANLEY
EMERGING MARKETS DEBT FUND, INC.
- ---------------------------------------------
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS James W. Grisham
Frederick B. Whittemore VICE PRESIDENT
VICE-CHAIRMAN OF THE BOARD Michael F. Klein
OF DIRECTORS VICE PRESIDENT
Warren J. Olsen Harold J. Schaaff, Jr.
PRESIDENT AND DIRECTOR VICE PRESIDENT
Peter J. Chase Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John W. Croghan Valerie Y. Lewis
DIRECTOR SECRETARY
David B. Gill James R. Rooney
DIRECTOR TREASURER
Graham E. Jones Belinda A. Brady
DIRECTOR ASSISTANT TREASURER
John A. Levin
DIRECTOR
</TABLE>
- ---------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- ---------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank
770 Broadway
New York, New York 10003
- ---------------------------------------------------------
SHAREHOLDER SERVICING AGENT
Boston Equiserve
Investor Relations Department
P.O. Box 644
Boston, Massachusetts 02102-0644
(617) 575-3120
- ---------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
- ---------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- ---------------------------------------------------------
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.
------------------------
MORGAN STANLEY
EMERGING MARKETS
DEBT FUND, INC.
---------------------
THIRD QUARTER REPORT
SEPTEMBER 30, 1996
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the nine months ended September 30, 1996, the Morgan Stanley Emerging
Markets Debt Fund, Inc. had a total return, based on net asset value per share,
of 38.25% compared to 25.15% for the J.P. Morgan Emerging Markets Bond Index.
For the period since the Fund's commencement of operations on July 23, 1993
through September 30, 1996, the Fund's total return, based on net asset value
per share, was 76.56% compared with 54.04% for the Index. On September 30, 1996,
the closing price of the Fund's shares on the New York Stock Exchange was
14 1/8, representing a 10.9% discount to the Fund's net asset value per share.
The long term outlook for emerging markets debt still remains positive.
Improving economic fundamentals in most of the emerging market countries, a
positive to neutral global liquidity environment and attractive valuations
relative to other fixed income asset classes should continue to buoy asset
prices. In the short run, we are concerned about sloppy trading conditions that
are typically seen during the fourth quarter of each year.
This year the fourth quarter effect could be more pronounced than others, as the
trading community and hedge funds will be anxious to lock in gains of over 40%.
A reduction for risk appetite and a feeling that spreads in the market had come
in to fair levels would leave the potential supply of paper looking for the ever
reluctant marginal buyer. Further the economic picture should be perceived to be
improving from just a cyclical bounce from recession troughs to a more
sustainable long run secular expansion of economic activity for continued spread
convergence and the jury is still out on this specific issue. Data from the
fourth quarter should give us a better idea about the trend of economic growth.
Since the beginning of the third quarter our strategy had been to overweight
countries such as Venezuela, Panama, Peru, Morocco and Russia and move in and
out of the core Latin American markets of Argentina, Mexico and Brazil. We
increased allocations to these countries when we believed that the cyclical
economic recoveries were taking hold and market perceptions regarding the credit
risks of these countries would improve based on dramatic improvements in
year-over-year performances during the middle of the quarter. We reduced
positions to these markets as they got fully valued and the market got ahead of
itself in pricing in all the fundamental improvements that had taken place.
Allocations were increased in the oil-exporting sector of the market as firmer
oil prices dramatically improved the cash flow situations of countries like
Nigeria and Algeria. Cash positions were gradually increased during the quarter
as we prepared for more attractive buying opportunities in the fourth quarter.
During 1997, Mexico has to engineer a reduction in real interest rates, weaken
the currency and increase the rate of growth. The precise combination of
economic policies to bring about this result is yet unknown and will keep
financial markets guessing. Our sense is that in an election year the Mexican
government will struggle for a while in finding the optimal policy mix.
Meanwhile the Peso and fixed income assets will remain volatile. Holdings of
Peso denominated paper were reduced in anticipation of fourth quarter volatility
in the currency. We do not anticipate changing our exposure to Mexico until such
time as their preference and choice of policy instruments is clear.
Argentina is more or less in the same boat as Mexico but without the degree of
freedom in its macroeconomic policy framework. Argentine policy makers have
however concentrated on improving microeconomic efficiency by focusing on
improving tax revenue collection and reform of labor laws. President Menem is
under political pressure to increase employment generation and the pace of
economic recovery. Corruption scandals and political jostling could muddy the
waters for a while. At some point assets will cheapen relative to other
benchmarks in the market to warrant an increased allocation. Argentine
allocations were increased marginally during the quarter as the perception of a
strong economic recovery taking root spread in the marketplace. We remain
cautious as concrete signs of such a recovery are yet to emerge.
Brazil on a fundamental level remains the strongest economic story in the
region. Post Real Plan stabilization challenges remain. Some of these include
the securing of long run fiscal stabilization, reforming the social security and
tax systems and reducing the burden that monetary and exchange rate policy have
to bear in the absence of progress on the fiscal side. The strategy of using
real exchange rate appreciation and high real interest rates to control
inflation may come under question in the future as the current account
deteriorates. Allocations were gradually reduced during the quarter as asset
prices firmed in advance of potential sovereign issuance and repurchase of Brady
bonds.
Russia remains the greatest source of risk and reward in the market. A murky
political situation with contenders for power jockeying for position in public
has coincided with lower than targeted revenue collection this fiscal
2
<PAGE>
year and could potentially jeopardize the stabilization achieved so far. The IMF
could suspend disbursements under the EFF facility if it believes sufficient
progress is not being made to remedy the situation. A withdrawal of
multi-lateral support will leave Russia with no financing alternatives but the
monetization of the fiscal deficit. The upside potential comes from a low
indebted country on the threshold of growth and stabilization and one which will
attract significant amounts of capital in the future. We believe that in the
short run there are bound to be problems which will appear insurmountable at
that time, but once political uncertainty abates the economic picture should
improve. The Russian position in the non-performing loan segment was trimmed as
valuation levels moved from cheap to fair and market participants became
excessively bullish about economic prospects for the country.
Outside the main countries, we are invested in the oil producing countries of
Venezuela, Ecuador and Nigeria and expect to remain exposed to them as oil
prices remain firm.
Peru and Panama will continue to trade expensive to the rest of the market due
to the small size of their Brady debt and the restructuring of their economies
that is currently underway. We will continue to retain our exposures to these
credits.
Bulgaria flirted with a potential default when the country delayed implementing
a restructuring of the banking system and closing down some loss making state
owned enterprises. Allocations were increased towards the end of the quarter to
just over 2% as bond prices touched levels which we believed were attractive.
The government has moved slowly to implement the conditions laid down by the IMF
and the World Bank for a resumption in lending.
Sincerely,
[SIGNATURE]
Warren J. Olsen
PRESIDENT AND DIRECTOR
[SIGNATURE]
Paul Ghaffari
PORTFOLIO MANAGER
October 31, 1996
3
<PAGE>
Morgan Stanley Emerging Markets Debt Fund, Inc.
Investment Summary as of September 30, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION (UNAUDITED)
TOTAL RETURN (%)
---------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (1)(3)
----------------------- ----------------------- -----------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR TO DATE 22.22% -- 38.25% -- 25.15% --
ONE YEAR 37.84+ 37.84%+ 48.60+ 48.60%+ 37.92 37.92%
SINCE INCEPTION* 57.34+ 15.26+ 76.56+ 19.50+ 54.04 14.49
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
A BAR CHART REFLECTING THE DATA BELOW IS REFLECTED HERE.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31: NINE MONTHS ENDED
1993* 1994 1995 SEPTEMBER 30, 1996 (UNAUDITED)
<S> <C> <C> <C> <C>
Net Asset Value Per Share $ 18.96 $ 12.23 $ 12.40 $ 15.85
Market Value Per Share $ 18.13 $ 11.38 $ 12.50 $ 14.13
Premium/(Discount) -4.4% -7.0% 0.8% -10.9%
Income Dividends $0.16 $1.49 $1.72 $1.08
Capital Gains Distributions - $0.41 - -
Morgan Stanley Emerging Markets Debt Fund, Inc. (2) 35.96% -25.95% 26.85%+ 38.25%
J. P. Morgan Emerging Markets Bond Index (1)(3)** 18.67% -18.68% 27.54% 25.15%
</TABLE>
<TABLE>
<C> <S>
(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. This return does not include the effect of dilution in
connection with the Rights Offering. 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 J.P. Morgan Emerging Markets Bond Index is a market weighted index
composed of all Brady bonds outstanding and includes Argentina, Brazil,
Bulgaria, Mexico, Nigeria, the Philippines, Poland and Venezuela.
* The Fund commenced operations on July 23, 1993.
** Unaudited
+ Adjusted for Rights Offering
</TABLE>
4
<PAGE>
Morgan Stanley Emerging Markets Debt Fund, Inc.
Portfolio Summary as of September 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Debt Instruments 95.8%
Short-Term Investments 3.6%
Purchased Options 0.6%
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Mexico 18.1%
Argentina 13.9%
Brazil 12.7%
Russia 10.1%
Venezuela 8.9%
Panama 7.5%
Jamaica 4.9%
Algeria 4.2%
Morocco 3.4%
Peru 3.3%
Nigeria 3.0%
Ecuador 2.8%
Bulgaria 2.4%
South Africa 1.1%
Other 3.7%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
---------------
<C> <S> <C>
1. Republic of Argentina Debt 11.5%
2. Republic of Brazil Debt 11.4
3. Republic of Russia Debt 10.1
4. Republic of Venezuela Debt 8.9
5. Republic of Panama Debt 7.5
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
---------------
<C> <S> <C>
6. Government of Jamaica Debt 4.9%
7. United Mexican States Debt 4.3
8. Algeria Debt 4.2
9. Kingdom of Morocco Debt 3.4
10. Central Bank of Nigeria Debt 3.0
---
69.2%
---
---
</TABLE>
5
<PAGE>
INVESTMENTS (UNAUDITED)
(Showing Percentage of Total Value of Investments)
- ------------
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ------------------------------------------------------------------------------
- ------------
DEBT INSTRUMENTS (95.8%)
- ------------------------------------------------------------------------------
- ----------
ALGERIA (4.2%)
LOAN AGREEMENT
Algeria Reprofiled Loan Agreement 'A' 1992
7.00%, 12/31/00 U.S.$22,773 U.S.$ 15,884
-------------
- ------------------------------------------------------------------------------
- -------------
ARGENTINA (13.7%)
BONDS (12.8%)
Industrias Pescarmona S.A.
11.75%, 3/27/98 1,000 1,021
Metrogas S.A. `B' 10.875%, 5/15/01 4,000 4,090
Republic of Argentina Bocon Pre 4 Zero Coupon,
9/1/02 10,900 10,926
+Republic of Argentina Discount Bond 6.44%,
3/31/23 6,400 4,736
+Republic of Argentina 'L' Bond 'Euro' 6.63%,
3/31/05 26,157 21,939
Republic of Argentina Par Bond 5.25%, 3/31/23 9,900 5,792
-------------
48,504
-------------
NOTE (0.9%)
Nortel Inversora 'A' 6.00%, 3/31/07 6,723 3,580
-------------
52,084
-------------
- ------------------------------------------------------------------------------
- -------------
BRAZIL (12.3%)
BONDS
Comtel Brasiliera Ltd. `A' 10.75%, 9/26/04 4,500 4,601
Federative Republic of Brazil 'C' Bond PIK
`Euro' 8.00%, 4/15/14 23,489 16,560
Federative Republic of Brazil 'C' Bond PIK
8.00%, 4/15/14 11,501 8,108
Federative Republic of Brazil Discount Bond
'Z-L' 6.50%, 4/15/24 10,500 8,038
Federative Republic of Brazil 'L' Bond 6.75%,
4/15/12 12,500 9,438
-------------
46,745
-------------
- ------------------------------------------------------------------------------
- -------------
BULGARIA (2.4%)
BONDS
Republic of Bulgaria Discount Bond 'A' 6.75%,
7/28/24 5,200 2,647
Republic of Bulgaria Front-Loaded Interest
Reduction Bond 'A' 'Euro' 2.25%, 7/28/12 20,200 6,628
-------------
9,275
-------------
- ------------------------------------------------------------------------------
- -------------
ECUADOR (2.8%)
BONDS
Republic of Ecuador Par Bond 3.00%, 2/28/25 65 26
Republic of Ecuador Par Bond `Euro' 3.25%,
2/28/25 13,400 5,394
Republic of Ecuador Past Due Interest Bond PIK
6.50%, 2/27/15 9,828 5,043
-------------
10,463
-------------
- ------------------------------------------------------------------------------
- -------------
INDIA (0.7%)
BOND
Saurashtra Cement Co. 17.00%, 9/7/97 INR 94,000 2,490
-------------
- ------------------------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ------------------------------------------------------------------------------
- ------------
JAMAICA (4.9%)
BOND
Government of Jamaica 12.00%, 7/19/99 U.S.$19,100 U.S.$ 18,527
-------------
- ------------------------------------------------------------------------------
- -------------
MEXICO (17.5%)
BONDS
Banamex Pagare Discount Bond, 4/3/97 MXP 28,045 3,238
Banamex Pagare Discount Bond, 10/9/97 29,671 3,013
Cemex S.A. 12.75%, 7/15/06 U.S.$20,000 21,900
Empresas ICA Sociedad Controladora S.A. 11.875,
5/30/01 8,500 8,920
Empresas La Moderna 11.375%, 1/25/99 6,500 6,792
Grupo Industrial Durango 12.625, 8/1/03 4,000 4,260
Nacional Financiera 17.00%, 2/26/99 ZAR 12,000 2,572
United Mexican States Global Bond 11.50%,
5/15/26 U.S.$12,700 12,622
United Mexican States Global Bond 11.375%,
9/15/16 3,100 3,088
-------------
66,405
-------------
- ------------------------------------------------------------------------------
- -------------
MOROCCO (3.4%)
LOAN AGREEMENT
+Kingdom of Morocco Restructuring and
Consolidation Agreement 'A' 1990
(Participation: Chase, J.P. Morgan) 6.44%,
1/1/09 16,200 12,758
-------------
- ------------------------------------------------------------------------------
- -------------
NIGERIA (3.0%)
BOND (1.6%)
Central Bank of Nigeria Par Bond 6.25%, 11/15/20
(Warrants Attached) 10,000 5,984
-------------
NOTE (1.4%)
Central Bank of Nigeria Promissory Note 3.96%,
1/5/10 11,000 5,366
-------------
11,350
-------------
- ------------------------------------------------------------------------------
- -------------
PANAMA (7.5%)
BONDS
Republic of Panama Interest Reduction Bond
3.50%, 7/17/14 31,183 19,723
+Republic of Panama Past Due Interest Bond PIK
6.75%, 7/17/16 12,448 8,558
-------------
28,281
-------------
- ------------------------------------------------------------------------------
- -------------
PERU (3.3%)
BOND (1.1%)
Republic of Peru Past Due Interest Bond 12/29/49 6,500 3,786
-------------
LOAN AGREEMENT (0.3%)
Republic of Peru -- Petroperu Working Capital
Loan 2,000 1,310
-------------
NOTE (1.9%)
+Peru Working Capital Lines 9,699 7,274
-------------
12,370
-------------
- ------------------------------------------------------------------------------
- -------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
- -------------
RUSSIA (10.1%)
BOND (5.7%)
Ministry of Finance Tranche IV, 3.00%, 5/14/03 U.S.$41,415 U.S.$ 21,665
-------------
LOAN AGREEMENTS (4.4%)
Bank for Foreign Economic Affairs DEM 24,700 12,145
Bank for Foreign Economic Affairs U.S.$ 6,650 4,643
-------------
16,788
-------------
38,453
-------------
- ------------------------------------------------------------------------------
- -------------
SOUTH AFRICA (1.1%)
BONDS
Republic of South Africa
Series 147, 11.50%, 5/30/00 ZAR 5,250 1,054
Series 150, 12.00%, 2/28/05 13,650 2,560
Series 175, 9.00%, 10/15/02 4,200 710
-------------
4,324
-------------
- ------------------------------------------------------------------------------
- -------------
VENEZUELA (8.9%)
BONDS
+Republic of Venezuela Debt Conversion Bond 'DL'
6.63%, 12/18/07 U.S.$10,500 8,702
+Republic of Venezuela Front Loaded Interest
Rate Reduction Bond 'A' 6.63%, 3/31/07 22,750 19,195
+Republic of Venezuela Front Loaded Interest
Rate Reduction Bond 'B' 6.50%, 3/31/07 7,000 5,906
-------------
33,803
-------------
- ------------------------------------------------------------------------------
- -------------
TOTAL DEBT INSTRUMENTS
(Cost $336,645) 363,212
-------------
- ------------------------------------------------------------------------------
- -------------
CONTRACTS
- ------------------------------------------------------------------------------
- -------------
PURCHASED OPTIONS (0.6%)
- ------------------------------------------------------------------------------
- ------------
ARGENTINA (0.1%)
Republic of Argentina Put, expiring 10/28/96,
strike price 84.1875 233 385
-------------
- ------------------------------------------------------------------------------
- -------------
BRAZIL (0.4%)
Federative Republic of Brazil `C' Bond Call
expiring 11/27/96, strike price 65 200 1,234
-------------
- ------------------------------------------------------------------------------
- -------------
MEXICO (0.1%)
United Mexican States Par Bond Put expiring
10/28/96, strike price 70.4375 238 465
-------------
- ------------------------------------------------------------------------------
- -------------
TOTAL PURCHASED OPTIONS
(Cost $1,176) 2,084
-------------
- ------------------------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ------------------------------------------------------------------------------
- -------------
SHORT-TERM INVESTMENTS (2.6%)
- ------------------------------------------------------------------------------
- ------------
ARGENTINA (0.1%)
Argentine Cellular 18.00%, 10/25/96 U.S.$ 516 U.S.$ 516
-------------
- ------------------------------------------------------------------------------
- -------------
UNITED STATES (2.5%)
REPURCHASE AGREEMENT
Chase Securities Inc. 5.40%, dated 9/30/96, due
10/1/96, to be repurchased at U.S.$9,456,
collateralized by U.S.$6,955 United States
Treasury Notes 10.625%, due 8/15/15, valued at
U.S.$9,572 (Cost U.S.$9,455) 9,455 9,455
-------------
- ------------------------------------------------------------------------------
- -------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $9,971) 9,971
-------------
- ------------------------------------------------------------------------------
- -------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (1.0%)
Deutsche Mark DEM 2,850 1,867
Mexican Peso MXP 15,000 1,990
-------------
(Cost $3,877) 3,857
-------------
- ------------------------------------------------------------------------------
- -------------
TOTAL INVESTMENTS (100%)
(Cost $351,669) 379,124
-------------
- ------------------------------------------------------------------------------
- -------------
OTHER ASSETS AND LIABILITIES
Other Assets U.S.$106,037
Liabilities (143,922) (37,885 )
----------- -------------
- ------------------------------------------------------------------------------
- -------------
NET ASSETS
Applicable to 21,531,260 issued and outstanding
U.S.$0.01 par value shares (100,000,000 shares
authorized) U.S.$341,239
-------------
-------------
- ------------------------------------------------------------------------------
- -------------
NET ASSET VALUE PER SHARE U.S.$ 15.85
-------------
-------------
- -----------------------------------------------------------------
- -------------
</TABLE>
<TABLE>
<C> <S>
DEM -- Deutsche Mark
INR -- Indian Rupee
MXP -- Mexican Peso
ZAR -- South African Rand
+ -- Variable/floating rate security--rate disclosed is as of
September 30, 1996.
PIK -- Payment-in-Kind. Income may be paid in additional
securities or cash at the discretion of the issuer.
</TABLE>
7
