<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 Harold J. Schaaff, Jr.
OF DIRECTORS VICE PRESIDENT
Warren J. Olsen Joseph P. Stadler
PRESIDENT AND DIRECTOR VICE PRESIDENT
Peter J. Chase Valerie Y. Lewis
DIRECTOR SECRETARY
John W. Croghan James R. Rooney
DIRECTOR TREASURER
David B. Gill Joanna M. Haigney
DIRECTOR ASSISTANT TREASURER
Graham E. Jones
DIRECTOR
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, N.A.
73 Tremont Street
Boston, Massachusetts 02108
- ---------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company (International)
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank, N.A. (Domestic)
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.
---------------------
FIRST QUARTER REPORT
MARCH 31, 1996
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the three months ended March 31, 1996, the Morgan Stanley Emerging Markets
Debt Fund, Inc. had a total return, based on net asset value per share, of 5.48%
compared to 3.76% for the J.P. Morgan Emerging Markets Bond Index. For the
period since the Fund's commencement of operations on July 23, 1993 through
March 31, 1996, the Fund's total return based on net asset value per share is
34.71% compared with 27.70% for the Index. On March 29, 1996, the closing price
of the Fund's shares on the New York Stock Exchange was $12 7/8, representing a
1.3% premium to the Fund's net asset value per share.
The positive momentum that emerging markets debt witnessed in the first few
weeks of the year faded as the U.S. bond markets re-evaluated the likely future
direction of U.S. interest rates. The U.S. yield curve at that point of time was
discounting continued easing of monetary policy, given the weak state of the
economy. The inventory adjustment combined with a restrictive fiscal stance and
weak conditions in the external sector had produced sub-par growth for the
fourth quarter of 1995. The continuation of these conditions into 1996 was
questioned by bond market participants at the beginning of the year and
leveraged investors unwound positions in the short end of the market and
initiated the reversal in yields. This back-up in yields was exacerbated by a
spate of economic releases which suggested that the economy was in fact picking
up steam in the first quarter. Rates eventually increased by 120 basis points in
the short end and 80 basis points at the long end of the yield curve.
The reversal in the fortunes of the U.S. bond market had an adverse impact on
emerging market debt asset prices. Deleveraging and a reduction in risk
exposures to the asset class prompted a 10% correction in prices over a course
of four weeks. Fixed rate collateralized bonds, bonds with the highest interest
rate duration, were the hardest hit. Floating-rate non-collateralized bonds
outperformed due to their low interest rate durations.
The Fund outperformed over the quarter as it was defensively positioned for the
move in interest rates, overweight positions in money market and floating rate
assets with low durations and had a sizable cash position during the correction
in the market. Our country allocations also were defensive in nature;
underweight in Argentina, Mexico and Brazil, the countries whose assets were
most likely to be negatively affected by overall market conditions, and
overweight in Russia, Morocco, Venezuela and Panama, countries with lower than
average market exposure.
Over the quarter, Bulgaria, Argentina, Mexico and Russia underperformed the
overall index and Peru, Panama, Poland, Venezuela and Ecuador outperformed the
market on average. Poland received an investment grade rating from S&P and
became the first emerging country to migrate from the asset class. Polish Brady
bonds rallied strongly on the news as rating action recognized the strong
performance of the economy and the implementation of structural reforms over the
last four years. Panama and Peru outperformed as they continued with their
steady economic performance and underweight investors sought to increase their
exposures to these countries. Some questions were raised about the
sustainability of growth in Peru, given the continuation of large current
account deficits and a strong exchange rate. Remedial action in the form of a
tightening of monetary policy to cool aggregate demand should alleviate these
concerns. We had retained our overweight position in Panama for most of the
quarter and had reduced some of our exposure into market strength. We remain
positive on the credit and will seek to maintain our current exposure.
Venezuela continued to make slow and steady progress towards implementing an
orthodox stabilization program. Progress was not without hiccups as the
political leadership postponed making harsh economic decisions, until there were
really no alternatives left to rescue the economy from an implosion resulting
from a severe decline in confidence. The eventual program had most of the
elements of an orthodox stabilization program. Venezuelan bonds rallied into the
news of the impending program as default risk was sharply reduced. We increased
our exposure to Venezuela during a bout of market skepticism and will retain our
aggressive overweight position to capture high yields and possible further
tightening of credit spreads.
2
<PAGE>
Argentina underperformed during the first quarter by 500 basis points as
continued weakness in the economy, resulting from the tequila affect induced
1995 recession, produced another round of political wrangling between the
President and his Finance Minister over policy alternatives available to jump
start growth in 1996. Economic growth should gather steam as the year
progresses, as firms rebuild inventories and consumer expenditures pick up. We
reduced our exposure to Argentina in the middle of the quarter as we became more
defensive on the market and increased it again towards the end of the quarter as
political problems appeared to have been sorted out.
Mexican Brady bonds underperformed the market as it was affected by concerns
over the impact of higher interest rates on the domestic economy. Our exposure
is limited primarily to local currency denominated treasury bills, which
performed well as the currency strengthened in nominal terms and interest rates
came down from the lofty levels seen at the beginning of the year. Mexican Brady
bonds trade at relatively tight spreads compared to the rest of the market and
we do not believe they offer value at such levels. The export-led economic
recovery seems to be taking a firmer hold and a drastic reduction in inflation
towards the second half of the year should result in a virtuous cycle of low
inflation, low interest rates and higher growth. The economy, however, remains
vulnerable to external shocks and the recent appreciation of the peso could
portend trouble ahead. We remain cautious on Mexico and believe higher yields
elsewhere in the market are more attractive.
Brazil continues to be the solid performer of the market. A strong vibrant
private sector, reasonable economic growth, lower inflation, and high foreign
reserves make it a safer place to invest in the long term. In the short run,
however, momentum to implement reforms that would increase the long-term
viability of the Real plan, such as the measures to reform social security and
the administrative machinery of the state, appears to be getting caught in the
politics as usual pre-election atmosphere of the Brazilian congress. Significant
progress on these issues is necessary to contain the fiscal deficit and maintain
economic stability. Brazil will remain a core holding in our portfolio, but we
will not overweight Brazil in the absence of any real chance of the leadership
regaining the upper hand in its attempt to push through necessary reform
measures in 1996.
Russia remains one of our largest positions. Russian loans underperformed in the
first quarter as concerns over a possible Communist victory in the Presidential
elections depressed prices. We believe that the incumbent President will gain
ground as the election date approaches and prices should rally in the next
quarter. Current valuations suggest that Russian non-performing loans trade at
wider spreads than Bulgaria. Based on credit fundamentals fair value should be
at least 500 basis points tighter than current levels.
We remain cautiously optimistic on emerging markets debt. Despite a negative
U.S. rate environment in the first quarter, emerging debt has performed well.
This has been true because of a contraction of credit spreads based on improving
economic stories. Management of portfolio duration remains a key aspect of
performance. Credit spreads are likely to be volatile in an environment when
interest rates are likely to go up. Our exposure to money market instruments in
local currencies should provide us with some diversification benefits.
Sincerely,
[SIGNATURE]
Warren J. Olsen
PRESIDENT AND DIRECTOR
[SIGNATURE]
Paul Ghaffari
PORTFOLIO MANAGER
April 29, 1996
3
<PAGE>
Morgan Stanley Emerging Markets Debt Fund, Inc.
Investment Summary as of March 31, 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 5.92% -- 5.48% -- 3.76% --
ONE YEAR 50.75+ 50.75%+ 58.24+ 58.24%+ 48.80 48.80%
SINCE INCEPTION* 36.35+ 12.21+ 34.71+ 11.71+ 27.70 9.52
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
THREE MONTHS
ENDED 3/31/96
1993* 1994 1995 (UNAUDITED)
<S> <C> <C> <C> <C>
Net Asset Value Per Share $ 18.96 $ 12.23 $ 12.40 $ 12.72
Market Value Per Share $ 18.13 $ 11.38 $ 12.50 $ 12.88
Premium/(Discount) -4.4% -7.0% 0.8% 1.3%
Income Dividends $0.16 $1.49 $1.72 $0.36
Capital Gains Distributions - $0.41 - -
Fund Total Return (2) 35.96% -25.95% 26.85%+ 5.48%
Index Total Return (1)(3)
** 18.67% -18.68% 27.54% 3.76%
</TABLE>
<TABLE>
<C> <S>
(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on per share net asset value 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) JP Morgan Emerging Markets Bond Index.
* 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 March 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Debt Instruments 92.7%
Short-Term Investments 7.3%
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Russia 20.9%
Brazil 16.8%
Argentina 14.1%
Venezuela 11.7%
Mexico 8.1%
South Africa 4.0%
Panama 3.9%
Ecuador 3.7%
Turkey 3.1%
Bulgaria 2.4%
Algeria 2.2%
Peru 2.2%
Nigeria 1.8%
India 1.1%
Poland 1.0%
Other 3.0%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
---------------
<C> <S> <C>
1. Government of Russia Debt 20.9%
2. Government of Brazil Debt 16.8
3. Government of Venezuela Debt 11.7
4. Government of Argentina Debt 10.9
5. Government of South Africa
Debt 4.1
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
---------------
<C> <S> <C>
6. Government of Panama Debt 4.1%
7. Government of Ecuador Debt 3.9
8. Government of Turkey Debt 3.2
9. Government of Bulgaria Debt 2.6
10. Empresas La Moderna, 11.375%,
1/25/99 2.4
---
80.6%
---
---
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS (UNAUDITED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- ------------
MARCH 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
DEBT INSTRUMENTS (92.7%)
- ---------------------------------------------------------
- ------------
ALGERIA (2.2%)
LOAN AGREEMENTS (2.2%)
+Algeria Reprofiled Loan Agreement 'A' U.S.$ 11,614 U.S.$ 6,330
--------------
- ---------------------------------------------------------
- ------------
ARGENTINA (14.1%)
BONDS (12.0%)
+Republic of Argentina Bocon Series 1
DL 3.188%, 4/1/01 1,000 935
+Republic of Argentina Bocon Pre 3
3.565%, 9/1/02 1,000 667
+Republic of Argentina Bocon Pre 1
3.565%, 4/1/07 1,000 692
Republic of Argentina Bocon Pre 4
Zero Coupon, 9/1/02 10,000 8,359
Banco de Galicia 10.875% 12/1/97 2,000 2,063
IMPSA 11.75%, 3/27/98 1,000 1,000
Republic of Argentina 'L' Bond 'Euro'
6.8125% 3/31/05 21,087 15,209
Republic of Argentina Discount Bond
6.5625% 3/31/23 4,400 2,830
Republic of Argentina Par Bond 5.00%,
3/31/23 4,400 2,285
--------------
34,040
--------------
NOTE (2.1%)
Nortel Inversora 'A' 6.00%, 3/31/07 11,541 6,117
--------------
40,157
--------------
- ---------------------------------------------------------
- ------------
BRAZIL (16.8%)
BONDS (16.8%)
+Federative Republic of Brazil 'C'
Bond PIK 8.00%, 4/15/14 11,275 6,652
+Federative Republic of Brazil 'C'
Bond PIK 'Euro' 8.00%, 4/15/14 26,849 15,841
+Federative Republic of Brazil
Discount Bond
'Z-L' 6.81%, 4/15/24 24,500 15,711
+Federative Republic of Brazil
Eligible Interest 'Euro' 6.81%,
4/15/06 199 146
+Federative Republic of Brazil Par
Bond 'Z-L' 4.25%, 4/15/24 17,000 8,649
+Minas Gerais 7.88%, 2/10/99 1,000 895
--------------
47,894
--------------
- ---------------------------------------------------------
- ------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
BULGARIA (2.4%)
BONDS (2.4%)
+Bulgaria Discount 'A' 'Euro' 6.25%,
7/28/24 U.S.$ 5,000 U.S.$ 2,491
+The Republic of Bulgaria Discount
Bond 'A' 6.25%, 7/28/24 49 24
+The Republic of Bulgaria Discount
Bond 'B' 6.75%, 7/28/24 880 438
+The Republic of Bulgaria Interest
Arrears Bond 'Euro' 6.25%, 7/28/11 6,124 2,706
+Bulgaria Interest Arrears Bond 6.25%,
7/28/11 3,024 1,336
--------------
6,995
--------------
- ---------------------------------------------------------
- ------------
ECUADOR (3.7%)
LOAN AGREEMENTS (1.9%)
+Republic of Ecuador IE Bond 'Euro'
6.50%, 12/21/04 7,901 5,452
--------------
BONDS (1.8%)
+Republic of Ecuador Discount Bond
6.06%, 2/28/25 792 429
Republic of Ecuador Discount Bond
'Euro' 6.06%, 2/28/25 1,615 874
+Republic of Ecuador Par Bond 3.00%,
2/28/25 65 22
+Republic of Ecuador Past Due Interest
Bond 6.06%, 2/27/15 9,939 3,851
--------------
5,176
--------------
10,628
--------------
- ---------------------------------------------------------
- ------------
INDIA (1.1%)
BOND (1.1%)
+Saurashtra Cement Co. 17.00%, 9/7/97 INR 94,000 3,101
--------------
- ---------------------------------------------------------
- ------------
MEXICO (6.9%)
BONDS (6.9%)
Banamex Pagare Discount Bond, 4/3/97 MXP 28,045 2,641
Banamex Pagare Discount Bond, 10/9/97 29,671 2,432
Empresas La Moderna 11.38%, 1/25/99 U.S.$ 6,500 6,628
Grupo Industrial Durango 12.00%,
7/15/01 4,500 4,326
Grupo Mexicano de DeSarrollo 8.25%,
2/17/01 1,000 520
National Finance SNC 17.00%, 2/26/99 MXP 12,000 2,989
--------------
19,536
--------------
- ---------------------------------------------------------
- ------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
NIGERIA (1.8%)
BOND (0.2%)
+Central Bank of Nigeria 6.25%,
11/15/20 (Warrants Attached) U.S.$ 1,000 U.S.$ 511
--------------
NOTE (1.6%)
+Central Bank of Nigeria Promissory
Note 5.09%, 1/5/10 11,000 4,593
--------------
5,104
--------------
- ---------------------------------------------------------
- ------------
PANAMA (3.9%)
LOAN AGREEMENT (3.9%)
Republic of Panama Loans 13,183 11,206
--------------
- ---------------------------------------------------------
- ------------
PERU (2.2%)
LOAN AGREEMENT (0.4%)
Republic of Peru -- Petroperu Working
Capital Loan 2,000 1,245
--------------
BOND (1.8%)
+Peru Working Capital Lines, 12/29/49 9,699 4,910
--------------
6,155
--------------
- ---------------------------------------------------------
- ------------
POLAND (1.0%)
NOTE (1.0%)
Republic of Poland Note, Zero Coupon,
1/8/97 3,166 2,709
--------------
- ---------------------------------------------------------
- ------------
RUSSIA (20.9%)
LOAN AGREEMENTS (11.9%)
+Bank for Foreign
Economic Affairs CHF 31,077 8,777
DEM 80,000 20,384
U.S.$ 14,150 4,829
--------------
33,990
--------------
BONDS (9.0%)
Ministry of Finance Tranche III 3.00%,
5/14/99 7,560 5,472
Ministry of Finance Tranche IV 3.00%,
5/14/03 48,215 20,039
--------------
25,511
--------------
59,501
--------------
- ---------------------------------------------------------
- ------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
SOUTH AFRICA (4.0%)
BONDS (4.0%)
Republic of South Africa Series 147,
11.50%, 5/30/00 ZAR 5,250 U.S.$ 1,189
Series 150, 12.00%, 2/28/05 14,490 3,103
Series 153, 13.00%, 8/31/10 13,020 2,854
Series 162, 12.50%, 1/15/02 12,180 2,774
Series 175, 9.00%, 10/15/02 4,200 794
Series 177, 9.50%, 5/15/07 3,150 549
--------------
11,263
--------------
- ---------------------------------------------------------
- ------------
VENEZUELA (11.7%)
BONDS (11.7%)
+Republic of Venezuela Debt Conversion
Bond 'DL' 6.5625%, 12/18/07 U.S.$ 18,500 11,216
+Republic of Venezuela Par Bond 'A'
6.75%, 3/31/20 (Oil Warrants
Attached) 15,000 8,494
+Republic of Venezuela Discount Bonds
'A' 6.6875%, 3/31/20 2,500 1,487
+Venezuela Flirbs 'A' 6.375%, 3/31/07 20,000 12,150
--------------
33,347
--------------
- ---------------------------------------------------------
- ------------
TOTAL DEBT INSTRUMENTS
(Cost $261,954) 263,926
--------------
- ---------------------------------------------------------
- ------------
SHORT-TERM INVESTMENTS (7.3%)
- ---------------------------------------------------------
- ------------
MEXICO (1.2%)
BILLS (1.2%)
Mexican Cetes,
Zero Coupon, 7/25/96 MXP 15,839 1,866
Zero Coupon, 9/26/96 15,000 1,667
--------------
3,533
--------------
- ---------------------------------------------------------
- ------------
TURKEY (3.1%)
BILLS (3.1%)
Turkish T-Bill,
Zero Coupon 6/26/96 TRL 464,675,000 5,281
Zero Coupon 7/10/96 312,000,000 3,425
--------------
8,706
--------------
- ---------------------------------------------------------
- ------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
UNITED STATES (3.0%)
REPURCHASE AGREEMENT (3.0%)
The Chase Manhattan Bank, N.A., 5.15%,
dated 3/29/96, due 4/1/96, to be
repurchased at U.S.$8,500,
collateralized by U.S.$8,615 United
States Treasury Notes 6.00%, due
8/31/97, valued at U.S.$8,669 U.S.$ 8,496 U.S.$ 8,496
--------------
- ---------------------------------------------------------
- ------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $22,480) 20,735
--------------
- ---------------------------------------------------------
- ------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (0.0%)
Indian Rupee (Cost $0) INR 5 --
--------------
- ---------------------------------------------------------
- ------------
TOTAL INVESTMENTS (100.0%)
(Cost $284,434) 284,661
--------------
- ---------------------------------------------------------
- ------------
OTHER ASSETS AND LIABILITIES
Other Assets U.S.$ 54,004
Liabilities (64,822) (10,818)
--------------
- ---------------------------------------------------------
- ------------
NET ASSETS
Applicable to 21,531,260 issued and
outstanding U.S.$0.01 par value
shares (100,000,000 shares
authorized) U.S.$ 273,843
------------
- ---------------------------------------------------------
- ------------
NET ASSET VALUE PER SHARE
U.S.$ 12.72
------------
</TABLE>
<TABLE>
<S> <C> <C>
- ---------------------------------------------
- ---------
CHF Swiss Franc
DEM Deutsche Mark
INR Indian Rupee
MXP Mexican Peso
TRL Turkish Lira
ZAR South African Rand
</TABLE>
+ -- Variable/floating rate security-rate disclosed as of March 31, 1996.
PIK -- Payment-in-Kind. Income may be paid in additional securities or cash at
the discretion of the issuer.
8
