<PAGE>
MORGAN STANLEY
EMERGING MARKETS DEBT FUND, INC.
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS
Michael F. Klein James W. Grisham
PRESIDENT AND DIRECTOR VICE PRESIDENT
Peter J. Chase Harold J. Schaaff, Jr.
DIRECTOR VICE PRESIDENT
John W. Croghan Joseph P. Stadler
DIRECTOR VICE PRESIDENT
David B. Gill Valerie Y. Lewis
DIRECTOR SECRETARY
Graham E. Jones Joanna M. Haigney
DIRECTOR TREASURER
John A. Levin Belinda A. Brady
DIRECTOR ASSISTANT TREASURER
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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 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
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT
Boston Equiserve
Investor Relations Department
P.O. Box 644
Boston, Massachusetts 02102-0644
(617) 575-3120
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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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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, 1997
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- ----------
For the nine months ended September 30, 1997, the Morgan Stanley Emerging
Markets Debt Fund, Inc. had a total return, based on net asset value per share,
of 30.39% compared to 17.88% for the J.P. Morgan Emerging Markets Bond Plus
Index (the "Index"). For the one year ended September 30, 1997, the Fund had a
total return, based on net asset value per share, of 42.40% compared to 26.23%
for the Index. Prior to January 1, 1997, the Fund used the J.P. Morgan Emerging
Markets Bond Index as its benchmark. For the period since the Fund's
commencement of operations on July 23, 1993 through September 30, 1997, the
Fund's total return, based on net asset value per share, was 151.41% compared
with 100.28% for the Index. On September 30, 1997, the closing price of the
Fund's shares on the New York Stock Exchange was $15.25, representing a 6.4%
discount to the Fund's net asset value per share.
Emerging market debt was propelled higher by the continuation of the rally in
U.S. bond prices and subsequent 35 basis point decline in U.S. Treasury yields
during the quarter. The decline in U.S. rates was fueled by a lack of
inflationary pressures and by a Federal Reserve which kept policy unchanged
during the quarter. Spreads on emerging market debt continued to narrow
through the summer months as has been typical in rallying U.S. bond market
environments. The average spread on a typical emerging market bond moved from
400 over U.S. Treasuries to 350 over U.S. Treasuries, while the yield on the
long bond declined from 6.78% to 6.40%.
We have maintained a somewhat cautious view on emerging market debt over the
last few months as it has been our belief that the recent strength in emerging
markets has been driven more by technical factors than by fundamental
improvements in sovereign credit outlooks. Technical factors such as the
continuous flow of money into emerging market and high yield mutual funds and
Brady bond buybacks by most of the larger Latin countries were the key drivers
which caused spreads to narrow for emerging market bonds. This occurred while
fundamental credit factors remained steady for most of Latin America and Eastern
Europe but deteriorated in Southeast Asia.
During the quarter, Bulgaria, Ecuador and Russia were the performance leaders,
while Morocco, Panama and the Philippines lagged the rest of the market. The
Fund's overweight positions in Bulgaria and Russia were largely responsible for
the portfolio's outperformance of 0.63% during the quarter. The Fund had almost
no exposure to any of the countries in Southeast Asia and was able to avoid the
price declines suffered by assets in that region.
We begin the fourth quarter with spreads at historically narrow levels and
interest rate hikes in the U.S. and Europe seemingly possible before year
end. Caution seems warranted because investor appetite for risk tends to
decrease during the fourth quarter and liquidity in all markets declines
toward year end. We are also mindful of the near term outlook for the
Southeast Asian region and continue to watch for potential contagion effects
on emerging market debt. While we are not expecting any large or widespread
correction, we do feel that a more conservative portfolio posture will
serve us well in the upcoming months.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
/s/ Paul Ghaffari
Paul Ghaffari
PORTFOLIO MANAGER
October 1997
2
<PAGE>
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
INVESTMENT SUMMARY AS OF SEPTEMBER 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION 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 39.70% -- 30.39% -- 17.88% --
One Year 49.59 49.59% 42.40 42.40% 26.23 26.23%
Since Inception* 135.36+ 22.65+ 151.41+ 24.60+ 100.28 18.03
Past performance is not predictive of future performance.
</TABLE>
RETURNS AND PER SHARE INFORMATION
[CHART]
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
NINE MONTHS
ENDED
1993* 1994 1995 1996 SEPTEMBER 30,1997
-------- ------- ------ ------ -----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value Per Share. . . . $ 18.96 $ 12.23 $ 12.40 $ 17.31 $ 16.29
Market Value Per Share . . . . . $ 18.13 $ 11.38 $ 12.50 $ 15.13 $ 15.25
Premium/(Discount) . . . . . . . -4.4 % -7.0 % 0.8 % -12.6 % -6.4 %
Income Dividends . . . . . . . . $ 0.16 $ 1.49 $ 1.72 $ 1.08 $ 1.27
Capital Gains Distributions. . . -- $ 0.41 -- -- $ 3.44
Fund Total Return (2). . . . . . 35.96% -25.95% 26.85%+ 50.98% 30.39%
Index Total Return (3) . . . . . 18.67% -18.93% 26.77% 39.31% 17.88%
</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) Prior to fiscal year 1997, the Fund used the J.P. Morgan Emerging Markets
Bond Index as its benchmark for performance purposes. Beginning in 1997,
the Fund is using the J.P. Morgan Emerging Markets Bond Plus Index for the
purpose of performance comparisons. This index includes a broader range of
debt instruments and more closely represented the investment strategy of
the Fund. Because the J.P. Morgan Emerging Markets Bond Plus Index was not
available prior to January 1, 1994, the performance of the J.P. Morgan
Emerging Markets Bond Index is shown for the period July 23, 1993 to
December 31, 1993, and for purposes of computing cumulative performance of
the benchmark index for that period. The J.P. Morgan Emerging Markets Bond
Plus Index is a market weighted index composed of Brady bonds, loans and
Eurobonds, as well as U.S. Dollar local market instruments of Argentina,
Brazil, Bulgaria, Mexico, Morocco, Nigeria, the Philippines, Poland,
Russia, Venezuela and South Africa.
* The Fund commenced operations on July 23, 1993.
+ This return does not include the effect of the rights issued in connection
with the Rights Offering.
3
<PAGE>
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
PORTFOLIO SUMMARY AS OF SEPTEMBER 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
Short-Term Investments (5.4%)
Debt Instruments (94.6%)
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
Argentina (11.0%)
Brazil (17.8%)
Bulgaria (5.2%)
Ecuador (2.4%)
Ivory Coast (2.5%)
Jamaica (4.9%)
Mexico (16.2%)
Netherlands (2.5%)
Russia (13.4%)
Venezuela (9.1%)
Other (15.0%)
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
PERCENT OF
TOTAL
INVESTMENTS
-----------
1. Federative Republic of Brazil 'C' Bond PIK
8.00%, 4/15/04 8.5%
2. Russia Principal Note,
Zero Coupon, 12/31/99 6.4
3. Republic of Venezuela Debt Conversion
Bond 9.25%, 9/15/27 5.5
4. Government of Jamaica 12.00%, 7/19/99 4.9
5. CIA International Telecom 144A 10.375%, 8/1/04 4.3
6. Republic of Argentina 6.688%, 3/31/05 3.9
7. United Mexican States Discount Bond
'C' 6.82%, 12/31/19 3.8
8. Republic of Venezuela Debt Conversion
Bond 'DL' 6.75%, 12/18/07 3.7
9. Salomon Brothers Federative Republic of
Brazil Credit Linked Enhanced Note 9.00%,
1/15/99 3.7
10. Federative Republic of Brazil Global
Bond 10.125%, 5/15/27 2.6
----
47.3%
----
----
* Excludes short-term investments.
4
<PAGE>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------
DEBT INSTRUMENTS (90.9%)
ALGERIA (1.3%)
LOAN AGREEMENTS
+Algeria Reprofiled Loan
Agreement Tranche 'A' U.S.$ 6,000 U.S.$ 5,400
------------
- -------------------------------------------------------------------------------
ARGENTINA (11.0%)
BONDS (9.3%)
+Acindar Industries 144A
11.75%, 11/12/98 1,500 1,560
CIA International
Telecom 144A 10.375%,
8/1/04 ARP 17,200 17,547
+Republic of Argentina
6.688%, 3/31/05 U.S.$ 16,992 16,181
Republic of Argentina
144A 11.75%, 2/12/07 ARP 2,500 2,827
------------
38,115
------------
NOTES (1.7%)
Nortel Inversora 'A'
6.00%, 3/31/07 U.S.$ 7,514 6,650
------------
44,765
------------
- -------------------------------------------------------------------------------
BRAZIL (14.1%)
BONDS
Federative Republic of Brazil
'C' Bond PIK
8.00%, 4/15/04 40,780 34,727
Federative Republic of
Brazil 'C' Bond PIK
Euro 8.00%, 4/15/04 6,948 5,917
+Federative Republic of
Brazil 'EI-L' Bond
6.875%, 4/15/06 6,831 6,411
Federative Republic of
Brazil Global Bond
10.125%, 5/15/27 10,410 10,433
------------
57,488
------------
- -------------------------------------------------------------------------------
BULGARIA (5.2%)
BONDS
+Republic of Bulgaria
Discount Bond 'A' Euro
6.688%, 7/28/24 7,000 5,819
Republic of Bulgaria
Front Loaded Interest
Reduction Bond
2.50%, 7/28/12 9,150 6,022
+Republic of Bulgaria
Past Due Interest Bond
6.688%, 7/28/11 11,600 9,367
------------
21,208
------------
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DOMINICAN REPUBLIC (1.6%)
BONDS
+Dominican Republic Past
Due Interest Bond
6.438%, 8/30/09 1,733 1,455
Tricom S.A. 144A 11.375%,
9/1/04 5,000 5,138
------------
6,593
------------
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ECUADOR (2.4%)
BONDS
Conecel 144A 14.00%, 5/1/02 3,150 3,402
Republic of Ecuador Past
Due Interest Bond
6.688%, 2/27/15 9,011 6,555
------------
9,957
------------
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INDIA (0.4%)
BONDS
Saurashtra Cement Co.
19.00%, 9/27/98 INR 65,000 1,795
------------
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IVORY COAST (2.5%)
BONDS (0.2%)
Republic of Ivory Coast
Front Loaded Interest
Reduction Bond 144A U.S.$ 2,000 782
------------
LOAN AGREEMENTS (2.3%)
Republic of Ivory Coast
Syndicated Loan,
Zero Coupon, 12/31/00 5,500 2,640
Republic of Ivory Coast
Syndicated Loan, Zero
Coupon, 12/31/00 FRF 75,646 6,772
------------
9,412
------------
10,194
------------
- -------------------------------------------------------------------------------
JAMAICA (4.9%)
BONDS
Government of Jamaica
12.00%, 7/19/99 U.S.$ 19,100 20,103
------------
- -------------------------------------------------------------------------------
JORDAN (0.1%)
BONDS
+Government of Jordan
Interest Arrears Bond
6.75%, 12/23/05 358 347
------------
- -------------------------------------------------------------------------------
MAURITIUS (0.8%)
FOREIGN GOVERNMENT & AGENCY OBLIGATIONS
Pindo Deli Finance
Mauritius 144A
10.75%, 10/1/07 3,200 3,258
------------
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5
<PAGE>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------
MEXICO (16.2%)
BONDS
Bancomext Global Bond
7.25%, 2/2/04 U.S.$ 3,470 U.S.$ 3,310
Bufete Industrial 144A
11.375%, 7/15/99 7,000 7,385
Empresas ICA Sociedad
Controladora (Registered)
11.875%, 5/30/01 1,000 1,120
Empresas ICA Sociedad
Controladora 144A
11.875%, 5/30/01 8,000 8,960
Empresas La Moderna
144A 11.375%, 1/25/99 6,500 6,869
National Financiera
17.00%, 2/26/99 ZAR 12,000 2,588
Petro Mexicanos 144A
9.50%, 9/15/27 U.S.$ 3,650 3,741
United Mexican States
11.50%, 5/15/26 8,470 10,308
United Mexican States Par
Bond, 6/30/03 43,623 -@
+United Mexican States
Discount Bond 6.836%,
12/31/19 5,300 5,071
+United Mexican States
Discount Bond 6.867%,
12/31/19 1,300 1,244
+United Mexican States
Discount Bond 'C'
6.82%, 12/31/19 16,250 15,549
------------
66,145
------------
- -------------------------------------------------------------------------------
MOROCCO (2.1%)
LOAN AGREEMENTS
Kingdom of Morocco
Restructuring and
Consolidation Agreement
'A' (Participation: Chase
Securities, Inc., J.P. Morgan,
Lehman Bros.) 6.813%,
1/1/09 9,350 8,777
------------
- -------------------------------------------------------------------------------
NETHERLANDS (2.5%)
BONDS
Unexim International
Finance 144A 9.875%,
8/1/00 10,000 10,125
------------
- -------------------------------------------------------------------------------
NIGERIA (1.5%)
NOTES
Central Bank of Nigeria
Promissory Note 3.75%,
1/5/10 11,000 5,988
------------
- -------------------------------------------------------------------------------
PERU (1.8%)
BONDS
Republic of Peru Front
Loaded Interest
Reduction Bond
13.25%, 3/7/17 11,698 7,209
Republic of Peru Front
Loaded Interest
Reduction Bond 3.25%,
3/7/17 300 185
------------
7,394
------------
- -------------------------------------------------------------------------------
RUSSIA (13.4%)
LOAN AGREEMENTS (4.8%)
Bank for Foreign
Economic Affairs
(Participation: J.P.
Morgan) 4,550 4,719
International Bank for
Economic Cooperation
Loan Agreement 12,743 9,144
International Bank for
Economic Cooperation
Loan Agreement DEM 14,450 5,785
------------
19,648
------------
NOTES (8.6%)
Russia Interest Arrears
Note, 12/31/99 U.S.$ 11,000 9,085
Russia Principal Note,
Zero Coupon, 12/31/99 35,100 26,172
------------
35,257
------------
54,905
------------
- -------------------------------------------------------------------------------
VENEZUELA (9.1%)
BONDS
Republic of Venezuela
Debt Conversion Bond
9.25%, 9/15/27 23,452 22,368
+Republic of Venezuela
Debt Conversion Bond
'DL' 6.75%, 12/18/07 15,750 15,036
------------
37,404
------------
- -------------------------------------------------------------------------------
TOTAL DEBT INSTRUMENTS
(Cost U.S.$354,476) 371,846
------------
- -------------------------------------------------------------------------------
STRUCTURED INVESTMENTS (3.7%)
- -------------------------------------------------------------------------------
BRAZIL (3.7%)
Salomon Brothers Federative
Republic of Brazil Credit
Linked Enhanced Note
9.00%, 1/15/99
(Cost U.S.$15,000) 15,000 14,978
------------
- -------------------------------------------------------------------------------
6
<PAGE>
FACE
AMOUNT VALUE
(000) (000)
- -------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (5.4%)
- -------------------------------------------------------------------------------
TURKEY (2.4%)
BONDS
Turkey Treasury Bill, Zero
Coupon, 8/12/98 TRL 3,558,049,000 U.S.$ 9,931
------------
- -------------------------------------------------------------------------------
UNITED KINGDOM (1.1%)
BONDS
ING Bank 144A, Zero
Coupon, 8/14/98 U.S.$ 4,700 4,641
------------
- -------------------------------------------------------------------------------
UNITED STATES (1.9%)
REPURCHASE AGREEMENT
Chase Securities, Inc., 5.75%,
dated 9/30/97, due
10/1/97, to be
repurchased at U.S.$7,529,
collateralized by United
States Treasury Bonds,
10.375%, due 11/15/12,
valued at U.S.$7,784 7,528 7,528
------------
- -------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S.$21,709) 22,100
------------
- -------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN
(0.0%)
Indian Rupee INR 10 1
------------
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(Cost U.S.$391,185) 408,925
------------
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
Other Assets U.S.$ 78,830
Liabilities (137,108) (58,278)
------------
- -------------------------------------------------------------------------------
NET ASSETS
Applicable to 21,531,260 issued and
outstanding U.S.$0.01 par value shares
(100,000,000 shares authorized) U.S.$350,647
------------
------------
- -------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 16.29
------------
------------
- -------------------------------------------------------------------------------
@ -- Value is less than U.S.$500.
+ -- Variable/floating rate security - rate disclosed is as of September 30,
1997.
ARP -- Argentine Peso
DEM -- German Mark
FRF -- French Franc
INR -- Indian Rupee
TRL -- Turkish Lira
ZAR -- South African Rand
PIK -- Payment-in-Kind. Income may be paid in additional securities or cash at
the discretion of the issuer.
7
