<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 Stefanie V. Chang
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
- --------------------------------------------------------------------------------
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
(800) 730-6001
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells LLP
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.
- --------------------------------------------------------------------------------
FIRST QUARTER REPORT
MARCH 31, 1998
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
For the three months ended March 31, 1998, the Morgan Stanley Emerging Markets
Debt Fund, Inc. had a total return, based on net asset value per share, of 7.21%
compared to 5.21% for the J.P. Morgan Emerging Markets Bond Plus Index (the
"Index"). For the one year ended March 31, 1998, and for the period since the
Fund's commencement of operations on July 23, 1993 through March 31, 1998, the
Fund's total return, based on net asset value per share, was 23.45% and 151.60%,
respectively, compared to 17.98% and 102.02%, respectively, for the Index. On
March 31, 1998, the closing price of the Fund's shares on the New York Stock
Exchange was $13 3/8, representing a 6.4% premium to the Fund's net asset value
per share.
The international backdrop to emerging market debt improved during the first
quarter of 1998, as U.S. interest rates stayed in a narrow range, investor
sentiment recovered and portfolio flows into emerging markets resumed.
Stabilization occurred as the South Koreans agreed on a bank debt rescheduling
and other emerging countries accelerated much needed structural reforms as a
means to avoid the "Asian Flu". Brazil and Russia allowed domestic interest
rates to rise dramatically in order to stabilize their currencies, while Mexico
and Venezuela announced fiscal spending cuts in an effort to offset the expected
decline in revenues and tax receipts resulting from lower oil prices. With the
exception of Indonesia, International Monetary Fund (IMF) and World Bank led
stabilization programs in most of the Asian countries significantly reduced the
risk for non-Asian emerging markets. By the end of the first quarter emerging
markets had passed the maximum point of danger and spreads, which had started
the year on a sour note, narrowed by 50 basis points.
During the latter part of the quarter, we reduced the Fund's exposure to Russian
debt. President Yeltsin's decision to sack his cabinet on March 23rd has
increased political uncertainty. At the same time plummeting oil prices and
lack of improvement in tax collection has prevented improvement in the fiscal
picture. We increased the Fund's exposure to Brazil, which should benefit from
privatization and direct investment flows in the coming months, as well as a
relatively stable political environment. We also increased the Fund's exposure
to Asian debt, which was trading at distressed levels at the beginning of the
quarter. These bonds were purchased in anticipation of and have benefited from
continued IMF efforts in the region, as well as Indonesia's gradual acceptance
of the international community's prescription for bolstering its ailing
financial system.
The market's strong performance year-to-date is a cause for some concern as we
believe that investors may be overly optimistic in their analysis of the rebound
in the Asian economies. Continued economic weakness in Japan and the large
amount of debt to be issued by Asian governments in order to finance growing
fiscal deficits and banking sector bail-outs will keep volatility high. The
combination of lower commodity prices and a heavy election calendar in the
second half of 1998 should limit spread tightening. In addition, wider current
account deficits in non-Asian countries, caused by import contractions in Asia
coupled with increased low priced exports from Asia, should weigh heavy on the
market.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
/s/ Paul Ghaffari
Paul Ghaffari
PORTFOLIO MANAGER
April 1998
2
<PAGE>
Morgan Stanley Emerging Markets Debt Fund, Inc.
Investment Summary as of March 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
HISTORICAL TOTAL RETURN (%)
INFORMATION ---------------------------------------------------------------------------------
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 12.85% -- 7.21% -- 5.21 --
ONE YEAR 41.77 41.77% 23.45 23.45% 17.98 17.98%
SINCE INCEPTION* 167.71+ 23.36+ 151.60+ 21.74+ 102.02 16.18
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- -------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
THREE MONTHS
ENDED
MARCH 31,
1993* 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share. . . $ 18.96 $ 12.23 $ 12.40 $ 17.31 $ 15.21 $ 12.57
Market Value Per Share . . . . $ 18.13 $ 11.38 $ 12.50 $ 15.13 $ 15.38 $ 13.38
Premium/(Discount) . . . . . . -4.4% -7.0% 0.8% -12.6% 1.1% 6.4%
Income Dividends . . . . . . . $ 0.16 $ 1.49 $ 1.72 $ 1.08 $ 1.27 $ 0.49
Capital Gains Distributions. . -- $ 0.41 -- -- $ 3.44 $ 2.94
Fund Total Return (2). . . . . 35.96% -25.95% 26.85%+ 50.98% 21.71% 7.21%
Index Total Return (3) . . . . 18.67% -18.93% 26.77% 39.31% 13.02% 5.21%
</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) 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 March 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE> <S> <C>
Short-Term Investments 5.0%
Debt Instruments 95.0%
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE> <S> <C>
Other 8.0%
Nigeria 2.2%
Korea 3.7%
Turkey 4.0%
Indonesia 4.1%
Jamaica 5.6%
Venezuela 5.7%
Mexico 13.4%
Brazil 24.9%
Russia 14.2%
Argentina 14.2%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
-----------
<S> <C>
1. Federative Republic of Brazil 'C' Bond
PIK 8.00%, 4/15/14 (Brazil) 10.6%
2. Russia Principal Note, PIK 3.249%, 12/15/20 (Russia) 6.1
3. Government of Jamaica 12.00%, 7/19/99 (Jamaica) 5.6
4. Federative Republic of Brazil Global Bond 10.125%,
5/15/27 (Brazil) 5.2
5. Federative Republic of Brazil 'EL-L' Bond 6.688%,
4/15/06 (Brazil) 4.9
6. Salomon Brothers Federative Republic of Brazil Credit
Linked Enhanced Note 9.00%, 1/15/99 (Brazil) 4.2
7. Ministry of Finance, Series IV 3.00%, 5/14/03 (Russia) 3.7
8. Republic of Argentina Global Bond 11.375%, 1/30/17
(Argentina) 3.4
9. United Mexican States 11.50%, 5/15/26 (Mexico) 3.2
10. Republic of Venezuela Debt Conversion Bond 9.25%,
9/15/27 (Venezuela) 2.9
----
49.8%
----
----
</TABLE>
4
<PAGE>
INVESTMENTS (UNAUDITED)
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- --------------------------------------------------------------------------------
MARCH 31, 1998
<TABLE>
<CAPTION>
FACE
AMOUNT
(000) VALUE
(000)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
DEBT INSTRUMENTS (90.9%)
- --------------------------------------------------------------------------------
ARGENTINA (14.2%)
Bonds (12.3%)
Acindar Industries
11.656%, 11/12/98 U.S.$ 1,500 U.S. $ 1,522
Argentina Global Bond
9.75%, 9/19/27 7,800 7,732
CIA International Telecom
10.375%, 8/1/04 ARP 10,200 9,360
Republic of Argentina
6.625%, 3/31/05 U.S.$ 6,650 6,139
Republic of Argentina
11.75%, 2/12/07 ARP 3,800 3,958
Republic of Argentina
Global Bond
11.375%, 1/30/17 U.S.$ 10,500 11,894
Republic of Argentina
Par Bond 'L-GP'
5.75%, 3/31/23 3,300 2,532
------------
43,137
------------
NOTES (1.9%)
Nortel Inversora 'A'
6.00%, 3/31/07 7,434 6,616
------------
49,753
------------
- --------------------------------------------------------------------------------
BRAZIL (20.7%)
BONDS (20.7%)
Federative Republic of
Brazil 'C' Bond PIK
8.00%, 4/15/14 44,174 37,189
Federative Republic of
Brazil 'EI-L' Bond
6.688%, 4/15/06 18,914 17,082
Federative Republic of
Brazil Global Bond
10.125%, 5/15/27 18,410 18,313
------------
72,584
------------
- --------------------------------------------------------------------------------
BULGARIA (1.5%)
BONDS (1.5%)
Republic of Bulgaria
Front Loaded Interest
Reduction Bond
2.25%, 7/28/12 3,050 2,038
Republic of Bulgaria
PDI Bond 6.563%, 7/28/11 4,100 3,213
------------
5,251
------------
- --------------------------------------------------------------------------------
ECUADOR (1.6%)
BONDS (1.6%)
Conecel
14.00%, 5/1/02 3,150 3,308
- -------------------------------------------------------------------------------
Republic of Ecuador Par Bond
3.50%, 2/28/25 U.S.$ 4,150 U.S.$ 2,281
------------
5,589
------------
- -------------------------------------------------------------------------------
INDIA (0.5%)
BONDS (0.5%)
Saurashtra Cement Co.
19.00%, 9/27/98 INR 65,000 1,620
------------
- --------------------------------------------------------------------------------
INDONESIA (4.1%)
BONDS (3.5%)
APP International Finance
8.867%, 9/15/99 U.S.$ 2,600 2,210
10.25%, 10/1/00 1,750 1,673
Indah Kiat International
Finance Global Bond 'A'
11.375%, 6/15/99 1,750 1,645
Pindo Deli Finance (Mauritius)
10.75%, 10/1/07 2,600 2,152
Tjiwi Kimia International
Global Bond
13.25%, 8/1/01 5,100 4,680
------------
12,360
------------
LOAN AGREEMENTS (0.6%)
Tjiwi Kimia International
Global Bond
13.25%, 8/1/01 2,300 2,110
------------
14,470
------------
- --------------------------------------------------------------------------------
IVORY COAST (0.7%)
BONDS (0.7%)
Republic of Ivory Coast
Front Loaded Interest
Reduction Bond
2.00%, 3/29/18 FRF 22,245 1,347
Republic of Ivory Coast
PDI Bond
1.90%, 3/29/18 14,890 1,045
------------
2,392
------------
- --------------------------------------------------------------------------------
JAMAICA (5.6%)
BONDS (5.6%)
Government of Jamaica
12.00%, 7/19/99 U.S.$ 19,100 19,673
------------
- --------------------------------------------------------------------------------
KOREA (3.7%)
BONDS (3.7%)
Export-Import Bank of Korea
6.50%, 10/6/99 8,700 8,369
9.00%, 5/1/98 4,500 4,514
------------
12,883
------------
- --------------------------------------------------------------------------------
5
<PAGE>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
MEXICO (13.4%)
BONDS (13.4%)
Bufete Industrial
11.375%, 7/15/99 U.S.$ 6,500 U.S .$6,338
Empresas ICA Sociedad
Controladora
11.875%, 5/30/01 9,000 9,765
Empresas La Moderna
11.375%, 1/25/99 6,500 6,760
Innova
12.875%, 4/1/07 3,100 3,309
National Financiera
17.00%, 2/26/99 ZAR 12,000 2,395
United Mexican States
11.50%, 5/15/26 U.S.$ 9,200 11,213
United Mexican States
Discount Bond
6.617%, 12/31/19 250 236
6.693%, 12/31/19 1,550 1,463
United Mexican States
Discount Bond 'C'
6.719%, 12/31/19 2,050 1,935
United Mexican States
Global Bond
9.875%, 1/15/07 1,300 1,401
11.375%, 9/15/16 1,800 2,121
------------
46,936
------------
- --------------------------------------------------------------------------------
NIGERIA (2.2%)
BONDS (0.6%)
Central Bank of Nigeria
Par Bond
6.25%, 11/15/20 3,000 2,198
NOTES (1.6%)
Central Bank of Nigeria
Promissory Note
3.641%, 1/5/10 11,000 5,637
------------
7,835
------------
- -------------------------------------------------------------------------------
PANAMA (0.1%)
BONDS (0.1%)
Republic of Panama PDI Bond
6.563%, 7/17/16 485 413
------------
- -------------------------------------------------------------------------------
PERU (0.8%)
BONDS (0.8%)
Republic of Peru Front Loaded
Interest Reduction Bond
3.25%, 3/7/17 4,289 2,709
------------
- -------------------------------------------------------------------------------
PHILIPPINES (0.5%)
BONDS (0.5%)
Bangko Sentral Pilipinas
8.60%, 6/15/27 1,800 1,644
------------
- --------------------------------------------------------------------------------
RUSSIA (14.2%)
BONDS (5.2%)
Ministry of Finance
10.00%, 6/26/07 U.S.$ 3,100 U.S.$ 2,966
Ministry of Finance, Series IV
3.00%, 5/14/03 18,350 12,765
Unexim International Finance
9.875%, 8/1/00 2,900 2,697
------------
18,428
------------
NOTES (9.0%)
Russia Interest Arrears Notes
6.719%, 12/15/15 13,925 9,895
Russia Principal Note, PIK
3.249%, 12/15/20 33,750 21,495
------------
31,390
------------
49,818
------------
- --------------------------------------------------------------------------------
TURKEY (1.4%)
BONDS (1.4%)
Pera Financial Services
9.375%, 10/15/02 5,200 4,908
------------
- --------------------------------------------------------------------------------
VENEZUELA (5.7%)
BONDS (5.7%)
Republic of Venezuela Debt
Conversion Bond
9.25%, 9/15/27 11,002 10,023
Republic of Venezuela Debt
Conversion Bond 'DL'
6.813%, 12/18/07 10,714 9,760
------------
19,783
------------
- --------------------------------------------------------------------------------
TOTAL DEBT INSTRUMENTS
(Cost U.S.$313,125) 318,261
------------
- --------------------------------------------------------------------------------
STRUCTURED INVESTMENTS (4.2%)
- --------------------------------------------------------------------------------
BRAZIL (4.2%)
Salomon Brothers
Federative Republic of Brazil
Credit Linked Enhanced Note
9.00%, 1/15/99
(Cost U.S. $15,000) 15,000 14,609
------------
<CAPTION>
NO. OF
RIGHTS
<S> <C> <C>
- --------------------------------------------------------------------------------
RIGHTS (0.0%)
- --------------------------------------------------------------------------------
MEXICO (0.0%)
United Mexican States Value
Recovery Rights, expiring
06/30/03 (Cost U.S.$--) 5,154,000 --
------------
- --------------------------------------------------------------------------------
6
<PAGE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
<S> <C> <C>
- --------------------------------------------------------------------------------
WARRANTS (0.0%)
- --------------------------------------------------------------------------------
NIGERIA (0.0%)
Central Bank of Nigeria,
expiring 11/15/20
(Cost U.S.$--) 2,000 U.S.$ --@
-------------
- --------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (4.7%)
PHILIPPINES (1.4%)
BONDS
ING Bank,
Zero Coupon, 8/14/98 U.S.$ 4,700 4,829
-------------
- --------------------------------------------------------------------------------
Turkey (2.6%)
BILLS
Turkey Treasury Bill,
Zero Coupon, 8/19/98 TRL 1,700,800,000 5,149
Zero Coupon, 9/02/98 1,408,300,000 4,163
-------------
9,312
-------------
- --------------------------------------------------------------------------------
UNITED STATES (0.7%)
REPURCHASE AGREEMENT
Chase Securities, Inc.,
5.60%, dated 3/31/98,
due 4/1/98, to be
repurchased at U.S.$2,468,
collateralized by U.S.$2,493,
United States Treasury Notes,
5.50%, due 12/31/00, valued
at U.S.$2,527 U.S.$ 2,468 2,468
-------------
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S.$16,669) 16,609
-------------
- --------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (0.2%)
German Mark
(Cost U.S.$796) DEM 1,454 786
-------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(Cost U.S.$345,590) 350,265
-------------
- --------------------------------------------------------------------------------
<CAPTION>
AMOUNT AMOUNT
(000) (000)
<S> <C> <C> <C>
OTHER ASSETS AND LIABILITIES
Other Assets U.S.$ 46,196
Liabilities (123,234) U.S.$(77,038)
--------------------- -------------
- --------------------------------------------------------------------------------
NET ASSETS
Applicable to 21,731,261 issued and
outstanding U.S.$0.01 par value shares
(100,000,000 shares authorized) U.S.$273,227
-------------
-------------
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 12.57
-------------
-------------
- --------------------------------------------------------------------------------
</TABLE>
@ -- Value is less than U.S.$500.
PIK -- Payment-in-Kind. Income may be paid in additional securities or
cash at the discretion of the issuer.
PDI -- Past Due Interest
7
