<PAGE>
----------------------------------------------------------------------
MORGAN STANLEY
EMERGING MARKETS
DEBT FUND, INC.
----------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1998
MORGAN STANLEY DEAN WITTER INVESTMENT
MANAGEMENT INC.
INVESTMENT ADVISER
MORGAN STANLEY
EMERGING MARKETS DEBT FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs
CHAIRMAN OF THE BOARD
OF DIRECTORS
Michael F. Klein
PRESIDENT AND DIRECTOR
Peter J. Chase
DIRECTOR
John W. Croghan
DIRECTOR
David B. Gill
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
William G. Morton, Jr.
DIRECTOR
Stefanie V. Chang
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
TREASURER
Belinda A. Brady
ASSISTANT TREASURER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- --------------------------------------------------------------------------------
CUSTODIAN
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
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers 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.
<PAGE>
LETTER TO SHAREHOLDERS
- ---------
For the year ended December 31, 1998, the Morgan Stanley Emerging Markets Debt
Fund, Inc. (the "Fund") had a total return, based on net asset value per share,
of -33.00% compared to -14.35% for the J.P. Morgan Emerging Markets Bond Plus
Index (the "Index"). For the period since the Fund's commencement of operations
on July 23, 1993 through December 31, 1998, the Fund's total return, based on
net asset value per share, was 57.24% compared to 64.46% for the Index. On
December 31, 1998, the closing price of the Fund's shares on the New York Stock
Exchange was $7 3/16, representing a 2.6% premium to the Fund's net asset value
per share.
Throughout the first two quarters of 1998, the Asian region remained in the
spotlight and often dictated the tone for emerging markets. During the first
quarter, emerging market debt recovered a large portion of the losses realized
in October of 1997, however the market remained volatile during this period of
spread compression, with general market spreads oscillating within a 100 basis
point range. In January, a market sell-off was caused by a worsening of
certain countries fiscal accounts due to historically low commodity prices as
well as policy inaction in Indonesia. The successful rescheduling of Korea's
short-term bank debt obligations late in the month reversed this. In February,
dramatic swings in the current account positions of Thailand and Korea combined
with proactive responses on the part of policy makers in Brazil, Mexico and
Russia to the worsening external environment helped bolster investor confidence.
By the early spring, the apparent economic and political stabilization in the
Asian region buoyed investor sentiment, causing spreads to rally to the mid
400's. However, this period of calm proved to be temporary. Spreads widened
out to above 600 basis points, as the "Asian Contagion" hit emerging markets
debt yet again during the second quarter of 1998 bringing returns for the first
half of the year close to zero.
During the second quarter, the medium term effects of 1997's Asian crisis were
manifesting themselves in the form of lower global demand for commodities and a
reduced demand for exports from other regions of the world especially Japan.
The yen declined versus the U.S. dollar which put pressure on all the currencies
in the Asian region. The ill health of the Japanese economy and of major
Japanese banks caused investors to adjust risk premiums higher and caused
liquidity for most emerging countries to evaporate. Investors feared that
Japan's inability to fix its economy would continue to weaken the yen and might
eventually cause a devaluation in China. This would increase the risk of
another round of currency devaluation in Asia and might further depress
commodity prices, a large source of earnings for many emerging countries.
Furthermore, President Suharto of Indonesia was forced out of office by a series
of national protests and riots, leaving a fragile political environment in his
absence. As investor sentiment soured in general, Russia's fiscal management
came under increased scrutiny causing a significant sell off in both the local
and external Russian debt markets. Lack of progress in tax collection, poor
corporate governance policies and a failed privatization led to a significant
rise in domestic interest rates and in difficulties rolling over domestic debt.
The Index was down -21.2% during the third quarter, which highlights the fact
that the vast majority of the negative price action had occurred during this
time period. During July, the Russian government successfully completed
negotiations on an assistance package from the International Monetary Fund but
this proved to be too little assistance too late. In August, investor
sensitivity to deteriorating credit fundamentals and a worsened global
environment for emerging countries reached a breakpoint and precipitated the
largest and broadest sell-off in emerging market debt history. The sell-off
transitioned from a focus on fundamentals to a technically driven liquidation
when Russia devalued its currency and defaulted on its domestic debt (ruble
denominated treasury bills) on August 17th. The Russian restructuring forced
many market participants to sell non-Russian assets to meet margin calls,
thereby contaminating the debt of all emerging countries. Spreads on the broad
emerging market debt benchmark widened by 861 basis points during that month.
The market effectively decoupled from events in Russia during September, as
every country within the Index posted positive results except Russia, which was
down an additional 23.81%. Emerging market debt continued to rebound during the
last quarter of the year, with the Index advancing by 9.92%. The market was
buoyed by interest rate cuts in the U.S., the completion of an International
Monetary Fund assistance program for Brazil, and finally by the hope that
emerging markets had already passed through the point of maximum pessimism.
The negatives facing emerging market countries in 1999 are daunting. Emerging
countries will have to confront slowing global gross domestic development growth
and continued weak commodity prices, while caught in the grip of global excess
capacity and deflationary forces. Additionally, 1999 will likely require
precise navigation through a myriad of potential land mines ranging from equity
market corrections, to Japanese bank defaults, to Bra-
2
<PAGE>
zilian economic instability. But rather than dwelling on what has been priced
into the markets, we prefer to focus on what might cause emerging market debt to
rally or fall further from current levels. For starters, we have seen a good
dose of monetary reflation during the final quarter of 1998. G-7 central banks
have cut interest rates aggressively and we may see emerging markets rise as
newfound liquidity works its way into the markets. With domestic interest rates
below 5% in all major developed countries, yields in the low teens may prove too
tempting to ignore. Also, the International Monetary Fund has been
substantially re-capitalized and may be both more willing and better positioned
to prevent a future liquidity driven crisis. Finally, it is true that in many
cases crisis breeds reform and that in effect, the markets have forced an
acceleration of structural adjustment agendas in most emerging countries.
This last factor may lead to improvement in the longer-term credit prospects for
certain sovereign issuers. Unfortunately, we do not believe that the momentum
provided by the easing of monetary conditions will be powerful enough to reverse
the negative fundamental forces for the most vulnerable emerging market credits
and we may experience an up-tick in default levels during 1999. As shown in the
chart below, the market did differentiate between stronger and weaker credits in
1998 and we expect this differentiation to continue. Despite what is generally
perceived to have been a catastrophic year for emerging market debt, only four
countries posted significantly negative returns.
U.S. DOLLAR TOTAL RETURN %
<TABLE>
<CAPTION>
COUNTRY 1998 PERFORMANCE
- ------- ----------------
<S> <C>
Argentina 3.57%
Brazil -15.39%
Bulgaria -0.01%
Ecuador -25.46%
Mexico 0.03%
Morocco -1.36%
Nigeria 2.33%
Panama 3.84%
Peru 2.40%
Philippines 11.28%
Poland 11.79%
Russia -82.57%
Venezuela -18.43%
</TABLE>
During the first few months of 1999, the market will likely experience liquidity
driven broad-based rallies. However, the trend toward credit polarization
should take precedence and it is for this reason we remain cautious on countries
such as Brazil, Ecuador and Venezuela. While each suffers from its own unique
set of problems, fiscal imbalances remain high and currencies vulnerable in each
of these countries. At the same time we believe that countries with sound
fundamentals and fewer imbalances such as Mexico, the Philippines and Bulgaria
should benefit most from the return of funds into emerging markets. We also see
value in countries such as Colombia and Turkey and Korea where credible reforms
initiated in 1998 look set to continue in 1999 and the large imbalances in these
countries should prove manageable.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
January 1999
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED.
3
<PAGE>
Morgan Stanley Emerging Markets Debt Fund, Inc.
Investment Summary as of December 31, 1998 (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>
One Year -32.04% -32.04% -33.00% -33.00% -14.35% -14.35%
Five Year 24.04 4.40 -15.65 2.95 38.59 6.74
Since Inception* 61.23+ 9.17+ 57.24+ 8.67+ 64.46 9.57
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 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 $ 7.01
Market Value Per Share . . . . . . . $ 18.13 $ 11.38 $12.50 $ 15.13 $15.38 $ 7.19
Premium/(Discount) . . . . . . . . . -4.4% -7.0% 0.8% -12.6% 1.1% 2.6%
Income Dividends . . . . . . . . . . $ 0.16 $ 1.49 $ 1.72 $ 1.08 $ 1.27 $ 1.41
Capital Gains Distributions. . . . . -- $ 0.41 -- -- $ 3.44 $ 2.94
Fund Total Return (2). . . . . . . . 35.96% -25.95% 26.85%+ 50.98% 21.71% -33.00%
Index Total Return (3) . . . . . . . 18.67% -18.93% 26.77% 39.31% 13.02% -14.35%
</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) The J.P. Morgan Emerging Markets Bond Plus Index is a total return index
tracking the traded U.S. Dollar currency denominated instruments in the
emerging markets. The index is composed of Brady Bonds, benchmark
Eurobonds, loans, and Argentina domestic debt. 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 used for
purposes of computing cumulative performance of the benchmark index for
that period.
* 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.
4
<PAGE>
Morgan Stanley Emerging Markets Debt Fund, Inc.
Portfolio Summary as of December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Debt Instruments (97.6%)
Short-Term Investments (2.4%)
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<S> <C>
Other (13.6%)
Russia (2.4%)
Ecuador (2.6%)
Philippines (2.8%)
Turkey (3.2%)
Colombia (4.2%)
Korea (4.5%)
Bulgaria (5.6%)
Brazil (13.4%
Argentina (24.6%)
Mexico (23.1%)
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
-----------
<S> <C>
1. United Mexican States Par Bonds
6.25%, 12/31/19 (Mexico) 12.0%
2. Republic of Argentina
6.188%, 3/31/05 (Argentina) 9.4
3. United Mexican States Discount Bond
12/31/19 (Mexico) 6.4
4. Federative Republic of Brazil 'C' Bond PIK
8.00%, 4/15/14 (Brazil) 5.5
5. Federative Republic of Brazil 'EI-L' Bond
6.625%, 4/15/06 (Brazil) 5.3
6. Republic of Argentina Par Bond 'L-GP'
5.75%, 3/31/23 (Argentina) 5.1
7. Republic of Argentina Global Bond
11.375%, 1/30/17 (Argentina) 3.7
8. Republic of Bulgaria Discount Bond'Euro
6.688%, 7/28/24 (Brazil) 3.4
9. Korea Electric Power Corp.
7.00%, 10/1/02 (Brazil) 2.9
10. Nortel Inversora 'A'
6.00%, 3/31/07 (Argentina) 2.9
----
56.6%
----
----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSESTS
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
- ---------
DECEMBER 31, 1998
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
DEBT INSTRUMENTS(97.6%)
- --------------------------------------------------------------------------------
ARGENTINA (24.6%)
CORPORATE (5.8%)
CIA International Telecom
10.375%, 8/1/04 ARP 350 U.S.$ 123.247
(b)10.375%, 8/1/04 4,200 2,964
Nortel Inversora 'A'
6.00%, 3/31/07 U.S.$ 7,434 4,469
(b)Supercanal Holdings S.A.
11.50%, 5/15/05 2,400 1,392
----------------
9,072
----------------
SOVEREIGN (18.8%)
Republic of Argentina
(d)6.188%, 3/31/05 17,155 14,668
11.00%, 10/9/06 920 911
Republic of Argentina
Global Bond
11.375%, 1/30/17 5,730 5,744
(d)Republic of Argentina Par
Bond 'L-GP'
5.75%, 3/31/23 10,930 7,897
----------------
29,220
----------------
38,292
----------------
- --------------------------------------------------------------------------------
BRAZIL (13.4%)
SOVEREIGN (13.4%)
(d,e)Federative Republic of
Brazil 'C' Bond PIK
5.00%, 4/15/14 14,163 8,533
(d)Federative Republic of
Brazil 'EI-L' Bond
6.125%, 4/15/06 12,787 8,296
(d)Federative Republic of Brazil
Debt Conversion 'L' Bond
6.188%, 4/15/12 7,860 4,038
----------------
20,867
----------------
- --------------------------------------------------------------------------------
BULGARIA (5.6%)
SOVEREIGN (5.6%)
(c)Republic of Bulgaria
Discount Bond 'A' Euro
6.688%, 7/28/24 7,400 5,282
(d)Republic of Bulgaria Front
Loaded Interest Reduction
Bond
2.50%, 7/28/12 2,950 1,696
(d)Republic of Bulgaria Past
Due Interest Bond
6.688%, 7/28/11 2,500 1,691
----------------
8,669
----------------
- --------------------------------------------------------------------------------
COLOMBIA (4.2%)
CORPORATE (0.9%)
(c)Transtel
0.016%, 8/13/08 8,613 1,352
----------------
- --------------------------------------------------------------------------------
SOVEREIGN (3.3%)
Republic of Colombia
7.625%, 2/15/07 U.S.$ 2,020 U.S.$ 1,682
(c)Republic of Columbia
12.243%, 8/13/05 3,720 3,441
----------------
5,123
----------------
6,475
----------------
- --------------------------------------------------------------------------------
ECUADOR (2.6%)
CORPORATE (0.5%)
Consorcio Ecuatorian Notes
14.00%, 5/1/02 1,520 775
(b)14.00%, 5/1/02 150 77
----------------
852
----------------
SOVEREIGN (2.1%)
(c)Republic of Ecuador
Discount Bond
6.625%, 2/28/25 5,620 2,880
(d)Republic of Ecuador Past
Due Interest Bond
3.25%, 2/27/15 871 356
----------------
3,236
----------------
4,088
----------------
- --------------------------------------------------------------------------------
INDIA (1.6%)
CORPORATE (1.6%)
(b)Reliance Industries Ltd.
10.375%, 6/24/16 2,020 1,607
(g)Saurashtra Cement Ltd.
19.00%, 9/27/99 INR 40,000 897
----------------
2,504
----------------
- --------------------------------------------------------------------------------
JAMAICA (2.1%)
SOVEREIGN (2.1%)
Government of Jamaica
12.00%, 7/19/99 U.S.$ 3,400 3,332
----------------
- --------------------------------------------------------------------------------
JORDAN (0.9%)
SOVEREIGN (0.9%)
Jordan Discount Bond
(b,c)6.00%, 12/23/23 1,147 708
(c)6.00%, 12/23/23 1,061 655
----------------
1,363
----------------
- --------------------------------------------------------------------------------
KOREA (4.5%)
QUASI-SOVEREIGN (4.5%)
Export-Import Bank of Korea
6.50%, 2/10/02 340 311
Korea Development Bank
7.125%, 9/17/01 2,200 2,078
Korea Electric Power Corp.
7.00%, 10/1/02 5,000 4,519
----------------
6,908
----------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
MEXICO (23.1%)
CORPORATE (1.9%)
(b)Innova
12.875%, 4/1/07 U.S.$ 2,490 U.S.$ 1,718
(c)Petro Mexicanos
9.574%, 7/15/05 1,330 1,237
----------------
2,955
----------------
SOVEREIGN (21.2%)
(e)United Mexican States
11.50%, 5/15/26 1,880 2,003
(c)United Mexican States
Discount Bond 'A'
6.116%, 12/31/19 3,820 3,118
(c)United Mexican States
Discount Bond 'B'
6.039%, 12/31/19 2,750 2,245
(c)United Mexican States
Discount Bond 'C'
6.201%, 12/31/19 1,300 1,061
(c)United Mexican States
Discount Bond 'D'
6.098%, 12/31/19 4,250 3,469
United Mexican States Global
Bond
9.875%, 1/15/07 860 853
11.375%, 9/15/16 1,490 1,550
United Mexican States Par Bond 'W-A'
6.25%, 12/31/19 1,840 1,436
United Mexican States Par Bond 'W-B'
6.25%, 12/31/19 22,053 17,215
----------------
32,950
----------------
35,905
----------------
- --------------------------------------------------------------------------------
PANAMA (2.3%)
SOVEREIGN (2.3%)
Republic of Panama
8.875%, 9/30/27 1,190 1,124
Republic of Panama Global Bond
8.875%, 9/30/27 1,640 1,550
(d)Republic of Panama Interest
Reduction Bond
3.75%, 7/17/14 1,120 846
----------------
3,520
----------------
- --------------------------------------------------------------------------------
PERU (2.4%)
SOVEREIGN (2.4%)
Peru Past Due Interest Bond
(d)4.00%, 3/7/17 2,320 1,467
Republic of Peru Front Loaded
Interest Reduction Bond
(d)3.25%, 3/7/17 3,350 1,913
(b,d)3.25%, 3/7/17 498 284
----------------
3,664
----------------
- --------------------------------------------------------------------------------
PHILIPPINES (2.8%)
SOVEREIGN (2.8%)
(d)Republic of Philippines 'B'
5.962%, 6/1/08 5,140 U.S.$ 4,292
----------------
- --------------------------------------------------------------------------------
RUSSIA (2.4%)
SOVEREIGN (2.4%)
(c)Russia Interest Arrears Notes
6.625%, 12/15/15 U.S.$ 331 37
(c,f)Russia Principal Note
3.313%, 12/15/20 15,346 997
Russian Federation
(b)8.75%, 7/24/05 5,040 1,184
(b)11.00%, 7/24/18 6,420 1,573
----------------
3,791
----------------
- --------------------------------------------------------------------------------
SOUTH AFRICA (1.2%)
QUASI-SOVEREIGN (1.2%)
Nacional Financiera
17.00%, 2/26/99 ZAR 12,000 1,925
----------------
- --------------------------------------------------------------------------------
TURKEY (2.1%)
CORPORATE (2.1%)
(b)Cellco Finance NV
15.00%, 8/1/05 U.S.$ 2,210 1,912
(b)Pera Financial Services
9.375%, 10/15/02 1,630 1,271
----------------
3,183
----------------
- --------------------------------------------------------------------------------
VENEZUELA (1.8%)
SOVEREIGN (1.8%)
(d)Republic of Venezuela Debt
Conversion Bond 'DL' 5.938%, 12/18/07 4,500 2,863
----------------
- --------------------------------------------------------------------------------
TOTAL DEBT INSTRUMENTS
(Cost U.S.$161,317) 151,641
----------------
<CAPTION>
NO. OF
RIGHTS
- --------------------------------------------------------------------------------
<S> <C> <C>
RIGHTS (0.0%)
- --------------------------------------------------------------------------------
MEXICO
(a)United Mexican States Value
Recovery Rights, expiring
06/30/03 (Cost U.S.) 18,646,000 --
---------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS(2.4%)
- ------------------------------------------------------------------------------
TURKEY (1.1%)
BILLS
Bankers Trust International
Plc, US Dollar Note linked
to Turkish Interest and
Turkish Lira Exchange Rate,
0.00%, 12/31/99 U.S.$ 1,800 U.S.$ 1,802
-----------------
- ------------------------------------------------------------------------------
UNITED STATES (1.3%)
REPURCHASE AGREEMENT
Chase Securities, Inc., 4.45%,
dated 12/31/98, due
1/4/99, to be repurchased
at U.S.$1,989, collateralized
by U.S.$1,200, United States
Treasury Bonds, 11.25%,
due 2/15/15, valued at
U.S.$2,036 1,988 1,988
-----------------
- ------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S.$3,790) 3,790
-----------------
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS(100.0%)
(Cost U.S.$165,107) 155,431
-----------------
- ------------------------------------------------------------------------------
OTHER ASSETS
Cash 4,497
Receivable for Investments Sold 5,767
Interest Receivable 4,662
Other Assets 15 14,941
-----------------
- ------------------------------------------------------------------------------
LIABILITIES
Deferred Country Taxes (299)
Payable For:
Dividends Declared (7,040)
Reverse Repurchase Agreements (6,358)
Investments Purchased (3,152)
Investment Advisory Fees (135)
Professional Fees (70)
Shareholder Reporting Expenses (60)
Directors' Fees and Expenses (37)
Custodian Fees (10)
Administrative Fees (10)
Other Liabilities (117) (17,288)
----------------- -----------------
- --------------------------------------------------------------------------------
NET ASSETS
Applicable to 21,850,771, issued and
outstanding U.S.$0.01 par value shares
(100,000,000 shares authorized) U.S.$ 153,084
-----------------
-----------------
- --------------------------------------------------------------------------------
NET ASSETS VALUE PER SHARE U.S.$ 7.01
-----------------
-----------------
- ------------------------------------------------------------------------------
<CAPTION>
AMOUNT
(000)
- ------------------------------------------------------------------------------
<S> <C>
AT DECEMBER 31, 1998, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------
Common Stock U.S.$ 219
Capital Surplus 277,506
Distributions In Excess of Net Investment
Income (560)
Distributions in Excess of Net Realized Gain (114,457)
Unrealized Depreciation on Investments
and Foreign Currency Translation (9,624)
- ------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 153,084
-----------------
-----------------
- ------------------------------------------------------------------------------
</TABLE>
(a) -- Non-income producing
(b) -- 144A Security - certain conditions for public sale may exist.
(c) -- Variable/floating rate security -- rate disclosed is as of
December 31, 1998.
(d) -- Step Bond -- coupon rate increases in increments to
maturity. Rate disclosed is as of December 31, 1998.
Maturity date disclosed is ultimate maturity.
(e) -- Denotes all or a portion of securities subject to repurchase
under Reverse Repurchase Agreements as of December 31, 1998.
See note A-4 to financial statements.
(f) -- Security is in default.
(g) -- Security valued at fair value -- See note A-1 to
financial statements.
@ -- Amount is less than U.S. $500.
PIK -- Payment-in-Kind. Income may be paid in additional
securities or cash.
- ------------------------------------------------------------------------------
DECEMBER 31, 1998 EXCHANGE RATES:
- ------------------------------------------------------------------------------
ARP Argentine Peso 0.999 = U.S.$1.00
INR Indian Rupee 42.470 = U.S.$1.00
ZAR South African Rand 5.890 = U.S.$1.00
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements
8
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
STATEMENT OF OPERATIONS (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,964
Less: Foreign Taxes Withheld. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (78)
- ------------------------------------------------------------------------------------------------------------------------
Total Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,886
- ------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,184
Interest Expense on Borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,849
Custodian Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
Shareholder Reporting Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Professional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
Directors' Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Country Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255
Amortization of Organization Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Other Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
- ------------------------------------------------------------------------------------------------------------------------
Total Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,107
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,779
- ------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (111,705)
Investment Securities Sold Short. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Written Option Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Foreign Currency Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,779)
- ------------------------------------------------------------------------------------------------------------------------
Net Realized Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (113,390)
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,617
Appreciation on Foreign Currency Translations . . . . . . . . . . . . . . . . . . . . . . . . . . 144
- ------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . 1,761
- ------------------------------------------------------------------------------------------------------------------------
Net Realized Loss and Change in Unrealized Appreciation/Depreciation . . . . . . . . . . . . . . . . . (111,629)
- ------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ (83,850)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C>
Operations:
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 27,779 U.S.$ 28,827
Net Realized Gain (Loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . (113,390) 60,350
Change in Unrealized Appreciation/Depreciation. . . . . . . . . . . . . . . . . . 1,761 (32,894)
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations . . . . . . . . . (83,850) 56,283
- ------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,153) (27,267)
In Excess of Net Investment Income. . . . . . . . . . . . . . . . . . . . . . . . (560) --
Net Realized Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (74,104)
In Excess of Net Realized Gain. . . . . . . . . . . . . . . . . . . . . . . . . . (63,390) --
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (94,103) (101,371)
- ------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (319,511 shares). . . . . . . . . . . . . . . . . . 3,481 --
- ------------------------------------------------------------------------------------------------------------------------
Total Decrease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (174,472) (45,088)
Net Assets:
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327,556 372,644
- ------------------------------------------------------------------------------------------------------------------------
End of Period (including (distributions in excess of net investment
income) / undistributed net investment income of U.S.$(560) and
U.S.$4,071, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 153,084 U.S.$ 327,556
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
9
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
STATEMENT OF CASH FLOWS (000)
- --------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments. . . . . . . . . . . U.S.$ 897,994
Purchases of Investments. . . . . . . . . . . . . . . . (792,974)
Net Decrease in Short-Term Investments. . . . . . . . . 8,736
Investment Income . . . . . . . . . . . . . . . . . . . 30,934
Interest Expense Paid . . . . . . . . . . . . . . . . . (2,941)
Operating Expenses Paid . . . . . . . . . . . . . . . . (3,031)
- --------------------------------------------------------------------------------
Net Cash Provided by Investing and Operating Activities 138,718
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Paid for Reverse Repurchase Agreements . . . . . . (53,281)
Cash Distributions Paid (net of reinvestments of $3,481) (83,582)
- --------------------------------------------------------------------------------
Net Cash Used for Financing Activities. . . . . . . . . (136,863)
- --------------------------------------------------------------------------------
Net Increase in Cash. . . . . . . . . . . . . . . . . . 1,855
CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . 2,642
- --------------------------------------------------------------------------------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . U.S.$ 4,497
- --------------------------------------------------------------------------------
RECONCILIATION OF NET INVESTMENT INCOME TO NET CASH
PROVIDED BY INVESTING AND OPERATING ACTIVITIES . . . . . .
- --------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . U.S.$ 27,779
Proceeds from Sales of Investments. . . . . . . . . . . 897,994
Purchases of Investments. . . . . . . . . . . . . . . . (792,974)
Net Decrease in Short-Term Investments. . . . . . . . . 8,736
Net Decrease in Receivables Related to Operations . . . 4,946
Net Increase in Payables Related to Operations. . . . . 119
Amortization of Organization Costs. . . . . . . . . . . 8
Accretion/Amortization of Discounts and Premiums. . . . (7,890)
- --------------------------------------------------------------------------------
Net Cash Provided by Investing and
Operating Activities. . . . . . . . . . . . . . . . . U.S.$ 138,718
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SELECTED PER SHARE DATA --------------------------------------------------------------------------------------
AND RATIOS: 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . U.S.$ 15.21 U.S.$ 17.31 U.S.$ 12.40 U.S.$ 12.23 U.S.$ 18.96
- ------------------------------------------------------------------------------------------------------------------------------------
Offering Costs . . . . . . . . . . . . . . . -- -- -- (0.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Investment Income. . . . . . . . . . . . 1.27 1.34 1.75 1.76 1.51
Net Realized and Unrealized Gain
(Loss) on Investments. . . . . . . . . . . (5.12) 1.27 4.24 1.16 (6.34)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations. . . . (3.85) 2.61 5.99 2.92 (4.83)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income. . . . . . . . . . . (1.39) (1.27) (1.08) (1.69) (1.49)
In Excess of Net Investment Income . . . . (0.02) -- -- (0.03) --
Net Realized Gain. . . . . . . . . . . . . -- (3.44) -- -- (0.41)
In Excess of Net Realized Gain . . . . . . (2.94) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . (4.35) (4.71) (1.08) (1.72) (1.90)
- ------------------------------------------------------------------------------------------------------------------------------------
Decrease in Net Asset Value due
to Rights Offering . . . . . . . . . . . . -- -- -- (1.01) --
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . U.S.$ 7.01 U.S.$ 15.21 U.S.$ 17.31 U.S.$ 12.40 U.S.$ 12.23
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD. . . . U.S.$ 7.19 U.S.$ 15.38 U.S.$ 15.13 U.S.$ 12.50 U.S.$ 11.38
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value . . . . . . . . . . . . . . . (32.04)% 40.81% 30.86% 37.48%+ (27.97)%
Net Asset Value (1). . . . . . . . . . . . (33.00)% 21.71% 50.98% 26.85%+ (25.95)%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS). . . . U.S.$153,084 U.S.$327,556 U.S.$372,644 U.S.$266,295 U.S.$196,282
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses Before Interest
Expense to Average Net Assets. . . . . . . 1.47% 1.51% 1.38% 1.50% 1.59%
Ratio of Expenses After Interest
Expense to Average Net Assets. . . . . . . 2.75% 2.27% 2.59% 1.89% 2.30%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . 12.50% 8.80% 12.14% 15.21% 10.79%
Portfolio Turnover Rate. . . . . . . . . . . 308% 361% 373% 348% 256%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ This return does not include the effect of the rights issued in connection
with the Rights Offering.
(1) 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 percentage is 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.
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- ---------
The Morgan Stanley Emerging Markets Debt Fund, Inc. (the "Fund"), was
incorporated in Maryland on May 6, 1993, and is registered as a non-diversified,
closed-end management investment company under the Investment Company Act of
1940, as amended. The Fund's primary investment objective is to produce high
current income and as a secondary objective, to seek capital appreciation,
through investments primarily in debt securities.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of its financial
statements. Generally accepted accounting principles may require management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results may differ from those estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all listed securities
for which market quotations are readily available are valued at the last
sale price on the valuation date, or if there was no sale on such date,
at the mean between the current bid and asked prices or the bid price if
only bid quotations are available. Securities which are traded
over-the-counter are valued at the average of the mean of the current
bid and asked prices obtained from reputable brokers. Securities may be
valued by independent pricing services which use prices provided by
market-makers or estimates of market values obtained from yield data
relating to investments or securities with similar characteristics.
Short-term securities which mature in 60 days or less are valued at
amortized cost. All other securities and assets for which market values
are not readily available (including investments which are subject to
limitations as to their sale) are valued at fair value as determined in
good faith by the Board of Directors (the "Board"), although the actual
calculations may be done by others.
2. TAXES: It is the Fund's intention to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly,
no provision for U.S. Federal income taxes is required in the financial
statements.
The Fund may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on either income earned or repatriated. The
Fund accrues such taxes when the related income is earned.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, with a market value at least equal to the amount of
the repurchase transaction, including principal and accrued interest. To
the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to determine
the adequacy of the collateral. In the event of default on the obligation
to repurchase, the Fund has the right to liquidate the collateral and apply
the proceeds in satisfaction of the obligation. In the event of default
or bankruptcy by the counterparty to the agreement, realization and/or
retention of the collateral or proceeds may be subject to legal
proceedings.
4. REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse repurchase
agreements with institutions that the Fund's investment adviser has
determined are creditworthy. Under a reverse repurchase agreement, the Fund
sells securities and agrees to repurchase them at a mutually agreed upon
date and price. Reverse repurchase agreements involve the risk that the
market value of the securities purchased with the proceeds from the sale of
securities received by the Fund may decline below the price of the
securities the Fund is obligated to repurchase. Reverse repurchase
agreements also involve credit risk with the counter party to the extent
that the value of securities subject to repurchase exceed the Fund's
liability under the reverse repurchase agreement. Securities subject to
repurchase under reverse repurchase agreements, if any, are designated as
such in the Statement of Net Assets.
At December 31, 1998, the Fund had reverse repurchase agreements
outstanding as follows:
<TABLE>
<CAPTION>
MATURITY IN
LESS THAN
365 DAYS
--------------
<S> <C>
Value of Securities Subject to
Repurchase .......................................... $ 6,339,000
Liability Under Reverse
Repurchase Agreement................................. $ 6,358,000
Weighted Average Interest Rate........................ 4.75%
</TABLE>
The average weekly balance of reverse repurchase agreements outstanding
during the year ended December 31, 1998 was approximately $26,316,000 at a
weighted average interest rate of 4.92%.
5. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into
U.S. dollars at the mean of the bid and asked prices of such currencies
against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates
of exchange on the valuation date;
12
<PAGE>
- investment transactions and investment income at the prevailing
rates of exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) are included in the reported net
realized and unrealized gains (losses) on investment transactions and
balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of foreign
currency exchange contracts, disposition of foreign currencies, currency
gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid. Net
unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on
investments and foreign currency translations in the Statement of Net
Assets. The change in net unrealized currency gains (losses) for the period
is reflected in the Statement of Operations.
The Fund may use derivatives to achieve its investment objectives. The Fund may
engage in transactions in futures contracts on foreign currencies, stock
indices, as well as in options, swaps and structured notes. Consistent with the
Fund's investment objectives and policies, the Fund may use derivatives for
non-hedging as well as hedging purposes.
Following is a description of derivative instruments and their associated risks
that the Fund may utilize:
6. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into foreign
currency exchange contracts generally to attempt to protect securities and
related receivables and payables against changes in future foreign exchange
rates and, in certain situations, to gain exposure to a foreign currency. A
foreign currency exchange contract is an agreement between two parties to
buy or sell currency at a set price on a future date. The market value of
the contract will fluctuate with changes in currency exchange rates. The
contract is marked-to-market daily and the change in market value is
recorded by the Fund as unrealized gain or loss. The Fund records realized
gains or losses when the contract is closed equal to the difference between
the value of the contract at the time it was opened and the value at the
time it was closed. Risk may arise upon entering into these contracts from
the potential inability of counterparties to meet the terms of their
contracts and is generally limited to the amount of unrealized gain on the
contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
7. LOAN AGREEMENTS: The Fund may invest in fixed and floating rate loans
("Loans") arranged through private negotiations between an issuer of
sovereign debt obligations and one or more financial institutions
("Lenders") deemed to be creditworthy by the investment adviser. The Fund's
investments in Loans may be in the form of participations in Loans
("Participations") or assignments of all or a portion of Loans
("Assignments") from third parties. The Fund's investment in Participations
typically results in the Fund having a contractual relationship with only
the Lender and not with the borrower. The Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the Lender selling the Participation and only upon receipt by the
Lender of the payments from the borrower. The Fund generally has no right
to enforce compliance by the borrower with the terms of the loan agreement.
As a result, the Fund may be subject to the credit risk of both the
borrower and the Lender that is selling the Participation. When the Fund
purchases Assignments from Lenders it acquires direct rights against the
borrower on the Loan. Because Assignments are arranged through private
negotiations between potential assignees and potential assignors, the
rights and obligations acquired by the Fund as the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Lender.
8. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The Fund
may make forward commitments to purchase or sell securities. Payment and
delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days)
after the date of the transaction. Additionally, the Fund may purchase
securities on a when-issued or delayed delivery basis. Securities purchased
on a when-issued or delayed delivery basis are purchased for delivery
beyond the normal settlement date at a stated price and yield, and no
income accrues to the Fund on such securities prior to delivery. When the
Fund enters into a purchase transaction on a when-issued or delayed
delivery basis, it either establishes a segregated account in which it
maintains liquid assets
13
<PAGE>
in an amount at least equal in value to the Fund's commitments to purchase
such securities or denotes such securities on the custody statement for its
regular custody account. Purchasing securities on a forward commitment or
when-issued or delayed-delivery basis may involve a risk that the market
price at the time of delivery may be lower than the agreed upon purchase
price, in which case there could be an unrealized loss at the time of
delivery.
9. SECURITIES SOLD SHORT: The Fund may sell securities short. A short sale is
a transaction in which the Fund sells securities it may or may not own, but
has borrowed, in anticipation of a decline in the market price of the
securities. The Fund is obligated to replace the borrowed securities at
their market price at the time of replacement. The Fund may have to pay a
premium to borrow the securities as well as pay any dividends or interest
payable on the securities until they are replaced. The Fund's obligation to
replace the securities borrowed in connection with a short sale will
generally be secured by collateral deposited with the broker that consists
of cash, U.S. government securities or other liquid, high grade debt
obligations. In addition, the Fund will either place in a segregated
account with its custodian or denote as pledged on the custody records an
amount of cash, U.S. government securities or other liquid high grade debt
obligations equal to the difference, if any, between (1) the market value
of the securities sold at the time they were sold short and (2) any cash,
U.S. government securities or other liquid high grade debt obligations
deposited as collateral with the broker in connection with the short sale
(not including the proceeds of the short sale). Short sales by the Fund
involve certain risks and special considerations. Possible losses from
short sales differ from losses that could be incurred from a purchase of a
security because losses from short sales may be unlimited, whereas losses
from purchases cannot exceed the total amount invested.
10. WRITTEN OPTIONS: The Fund may write covered call options in an attempt to
increase the Fund's total return. The Fund will receive premiums that are
recorded as liabilities and subsequently adjusted to the current value of
the options written. Premiums received from writing options which expire
are treated as realized gains. Premiums received from writing options which
are exercised or are closed are added to or offset against the proceeds or
amount paid on the transaction to determine the net realized gain or loss.
By writing a covered call option, the Fund foregoes in exchange for the
premium the opportunity for capital appreciation above the exercise price
should the market price of the underlying security increase.
11. SWAPS: A swap is an agreement to exchange the return generated by one
instrument for the return generated by another instrument. The following
summarizes the types of swaps that the Fund may enter into:
INTEREST RATE SWAPS: Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal
amount. The Fund may utilize interest rate swaps in an attempt to increase
income while limiting the Fund's exposure to market fluctuations in
interest rates. Net periodic interest payments to be received or paid are
accrued daily and are recorded in the Statement of Operations as an
adjustment to interest income. Interest rate swaps are marked-to-market
daily based upon quotations from market makers and the change, if any, is
recorded as an unrealized gain or loss in the Statement of Operations.
TOTAL RETURN SWAPS: Total return swaps involve commitments to pay interest
in exchange for a market-linked return based on a notional amount and
provide the Fund with the full benefit on an investment in a security
without an initial cash outlay. To the extent the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. Total return swaps are
marked-to-market daily based upon quotations from market makers and the
change, if any, is recorded as an unrealized gain or loss in the Statement
of Operations. Payments received or made at the end of each measurement
period are recorded as realized gain or loss in the Statement of
Operations.
Realized gains or losses on maturity or termination of interest rate and
total return swaps are presented in the Statement of Operations. Because
there is no organized market for these swap agreements, the value reported
in the Statement of Net Assets may differ from that which would be realized
in the event the Fund terminated its position in the agreement. Risks may
arise upon entering into these agreements from the potential inability of
the counterparties to meet the terms of the agreements and are generally
limited to the amount of net interest payments to be received and/or
favorable movements in the value of the underlying security, instrument or
basket of instruments, if any, at the date of default.
12. STRUCTURED SECURITIES: The Fund may invest in interests in entities
organized and operated solely for the purpose of restructuring the
investment characteristics of sovereign debt obligations. This type of
restructuring involves the deposit with or purchase by an entity of
specified instruments and the issuance by that entity of one or more
classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. Structured Securities generally
will expose the Fund to credit risks of the underlying instruments as well
as of the
14
<PAGE>
issuer of the Structured Security. Structured Securities are typically sold
in private placement transactions with no active trading market.
Investments in Structured Securities may be more volatile than their
underlying instruments, however, any loss is limited to the amount of the
original investment.
13. OVER-THE-COUNTER TRADING: Derivative instruments that may be purchased or
sold by the Fund are expected to regularly consist of instruments not
traded on an exchange. The risk of nonperformance by the obligor on such an
instrument may be greater, and the ease with which the Fund can dispose of
or enter into closing transactions with respect to such an instrument may
be less, than in the case of an exchange-traded instrument. In addition,
significant disparities may exist between bid and asked prices for
derivative instruments that are not traded on an exchange. Derivative
instruments not traded on exchanges are also not subject to the same type
of government regulation as exchange traded instruments, and many of the
protections afforded to participants in a regulated environment may not be
available in connection with such transactions.
14. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Interest
income is recognized on the accrual basis and discounts and premiums on
investments purchased are accreted or amortized in accordance with the
effective yield method over their respective lives, except where collection
is in doubt. Distributions to shareholders are recorded on the ex-dividend
date.
The amount and character of income and capital gain distributions to be
paid are determined in accordance with Federal income tax regulations which
may differ from generally accepted accounting principles. These differences
are primarily due to differing book and tax treatments for foreign currency
transactions and the timing of the recognition of losses on securities.
Permanent book and tax basis differences relating to shareholder
distributions may result in reclassifications to undistributed net
investment income (loss), accumulated net realized gain (loss) and capital
surplus.
Adjustments for permanent book-tax differences, if any, are not reflected
in ending undistributed net investment income (loss) for the purpose of
calculating net investment income (loss) per share in the financial
highlights.
B. Morgan Stanley Dean Witter Investment Management Inc. (the "Adviser")
provides investment advisory services to the Fund under the terms of an
Investment Advisory and Management Agreement (the "Agreement"). Under the
Agreement, the Adviser is paid a fee computed weekly and payable monthly at
an annual rate of 1.00% of the Fund's average weekly net assets.
C. The Chase Manhattan Bank, through its corporate affiliate Chase Global
Funds Services Company (the "Administrator"), provides administrative
services to the Fund under an Administration Agreement. Under the
Administration Agreement, the Administrator is paid a fee computed weekly
and payable monthly at an annual rate of 0.06% of the Fund's average weekly
net assets, plus $100,000 per annum. In addition, the Fund is charged
certain out-of-pocket expenses by the Administrator.
D. The Chase Manhattan Bank and its affiliates serve as custodian for the
Fund. The Fund's assets held outside the United States have been held by
Morgan Stanley Trust Company ("MSTC"), which was an affiliate of the
Adviser prior to October 1, 1998. On October 1, 1998, MSTC was acquired by
the Chase Manhattan Bank. Custody fees are payable monthly based on
assets held in custody, investment purchase and sales activity and account
maintenance fees, plus reimbursement for certain out-of-pocket expenses.
Through September 30,1998, the Fund paid MSTC fees of approximately
$87,000.
E. During the year ended December 31, 1998, the Fund made purchases and
sales totaling approximately $794,850,000 and $903,740,000 respectively, of
investment securities other than long-term U.S. Government securities,
purchased options and short-term investments. There were no purchases and
sales of long-term U.S. Government securities. At December 31, 1998, the
U.S. Federal income tax cost basis of securities was approximately
$176,888,000 and, accordingly, net unrealized depreciation for U.S. Federal
income tax purposes was $21,457,000, of which $4,547,000 related to
appreciated securities and $26,004,000 related to depreciated securities.
At December 31, 1998, the Fund had a capital loss carryforward for U.S.
Federal income tax purposes of approximately $93,820,000 available to
offset future capital gains all of which will expire on December 31, 2006.
To the extent that capital gains are offset, such gains will not be
distributed to the shareholders. For the year ended December 31, 1998, the
Fund intends to elect to defer to January 1, 1999 for U.S. Federal income
tax purposes, post-October currency losses of $17,000 and post-October
capital losses of $8,856,000.
15
<PAGE>
F. During the year ended December 31, 1998, the Fund's written covered
call option activity was as follows:
<TABLE>
<CAPTION>
FACE PREMIUM
AMOUNT (000) (000)
------------ ---------
<S> <C> <C>
Options outstanding at
January 1, 1998....................... $ -- $ --
Options written during the
year.................................. 10,964 96
Options closed during the
year.................................. (10,964) (96)
-------- ------
Options outstanding at
December 31, 1998..................... $ -- $ --
-------- ------
-------- ------
</TABLE>
G. A portion of the Fund's net assets consist of securities of issuers
located in emerging markets which are denominated in foreign currencies.
Changes in currency exchange rates will affect the value of and investment
income from such securities. Emerging market securities are often subject
to greater price volatility, limited capitalization and liquidity, and
higher rates of inflation than U.S. securities. In addition, emerging
market securities may be subject to substantial governmental involvement in
the economy and greater social, economic and political uncertainty.
These investments are often traded by one market maker who may also be
utilized by the Fund to provide pricing information used to value such
securities. The amounts which will be realized upon disposition of the
securities may differ from the value reflected on the statement of net
assets and the differences could be material.
H. Each Director of the Fund who is not an officer of the Fund or an
affiliated person as defined under the Investment Company Act of 1940, as
amended, may elect to participate in the Directors' Deferred Compensation
Plan (the "Plan"). Under the Plan, such Directors may elect to defer
payment of a percentage of their total fees earned as a Director of the
Fund. These deferred portions are treated, based on an election by the
Director, as if they were either invested in the Fund's shares or invested
in U.S. Treasury Bills, as defined under the Plan. The deferred fees
payable, under the Plan, at December 31, 1998 totaled $37,000 and are
included in Payable for Directors' Fees and Expenses on the Statement of
Net Assets.
I. During December 1998, the Board declared a distribution of $0.3222 per
share, derived from net investment income, payable on January 8, 1999, to
shareholders of record on December 31, 1998.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION (UNAUDITED):
For the year ended December 31, 1998, the Fund expects to pass through to
shareholders foreign tax credits of approximately $332,000. In addition, for
the year ended December 31, 1998, gross income derived from sources within
foreign countries amounted to $25,570,000.
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- ----------
To the Shareholders and Board of Directors of
Morgan Stanley Emerging Markets Debt Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations, of changes in net assets and of cash flows and the
financial highlights present fairly, in all material respects, the financial
position of Morgan Stanley Emerging Markets Debt Fund, Inc. (the "Fund") at
December 31, 1998, the results of its operations and its cash flows for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 8, 1999
17
<PAGE>
YEAR 2000 DISCLOSURE (UNAUDITED):
The investment advisory services provided to the Fund by the Adviser depend on
the smooth operation of its computer systems. Many computer and software systems
in use today cannot recognize the year 2000, but revert to 1900 or some other
date, due to the manner in which dates were encoded and calculated. That failure
could have a negative impact on the handling of securities trades, pricing and
account services. The Adviser has been actively working on necessary changes to
its own computer systems to deal with the year 2000 problem and expects that its
systems will be adapted before that date. There can be no assurance, however,
that the Adviser will be successful. In addition, other unaffiliated service
providers may be faced with similar problems. The Adviser is monitoring their
remedial efforts, but, there can be no assurance that they and the services they
provide will not be adversely affected.
In addition, it is possible that the markets for securities in which the Fund
invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic uncertainties.
Earnings of individual issuers will be affected by remediation costs, which may
be substantial and may be reported inconsistently in U.S. and foreign financial
statements. Accordingly, the Fund's investments may be adversely affected.
18
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), each shareholder will be deemed to have elected, unless Boston
Equiserve (the "Plan Agent") is otherwise instructed by the shareholder in
writing, to have all distributions automatically reinvested in Fund shares.
Participants in the Plan have the option of making additional voluntary cash
payments to the Plan Agent, annually, in any amount from $100 to $3,000, for
investment in Fund shares.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per
share equals or exceeds net asset value per share on the reinvestment date,
the Fund will issue shares to participants at net asset value. If net asset
value is less than 95% of the market price on the reinvestment date, shares
will be issued at 95% of the market price. If net asset value exceeds the
market price on the reinvestment date, participants will receive shares
valued at market price. The Fund may purchase shares of its Common Stock in
the open market in connection with dividend reinvestment requirements at the
discretion of the Board of Directors. Should the Fund declare a dividend or
capital gain distribution payable only in cash, the Plan Agent will purchase
Fund shares for participants in the open market as agent for the
participants.
The Plan Agent's fees for the reinvestment of dividends and
distributions will be paid by the Fund. However, each participant's account
will be charged a pro rata share of brokerage commissions incurred on any
open market purchases effected on such participant's behalf. A participant
will also pay brokerage commissions incurred on purchases made by voluntary
cash payments. Although shareholders in the Plan may receive no cash
distributions, participation in the Plan will not relieve participants of any
income tax which may be payable on such dividends or distributions.
In the case of shareholders, such as banks, brokers or nominees, which
hold shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the shareholder as representing the total amount registered in the
shareholder's name and held for the account of beneficial owners who are
participating in the Plan.
Shareholders who do not wish to have distributions automatically
reinvested should notify the Plan Agent in writing. There is no penalty for
non-participation or withdrawal from the Plan, and shareholders who have
previously withdrawn from the Plan may rejoin at any time. Requests for
additional information or any correspondence concerning the Plan should be
directed to the Plan Agent at:
Morgan Stanley Emerging Markets Debt Fund, Inc.
Boston Equiserve
Dividend Reinvestment Unit
P.O. Box 1681
Boston, MA 02105-1681
1-800-730-6001
19
