MERRILL LYNCH
MIDDLE EAST/
AFRICA FUND, INC.
FUND LOGO
Quarterly Report
August 31, 1998
Officers and Directors
Arthur Zeikel, President and Director
Donald Cecil, Director
Edward H. Meyer, Director
Charles C. Reilly, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Grace Pineda, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President
Gerald M. Richard, Treasurer
James W. Harshaw, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800)637-3863
Investing in emerging market securities involves a number of risk
factors and special considerations, including restrictions on
foreign investments and on repatriation of capital invested in
emerging markets, currency fluctuations, and potential price
volatility and less liquidity of securities traded in emerging
markets. In addition, there may be less publicly available
information about the issuers of securities, and such issuers may
not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those to which US companies
are subject. Therefore, the Fund is designed as a long-term
investment for investors capable of assuming the risks of investing
in emerging markets. The Fund should be considered as a vehicle for
diversification and not as a complete investment program. Please
refer to the prospectus for details.
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.
Merrill Lynch
Middle East/Africa
Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
Asset Allocation
As a Percentage* of
Net Assets as of
August 31, 1998
A map illustrating the following percentages:
Ghana 4.1%
Morocco 10.0%
South Africa 8.8%
Botswana 2.5%
Turkey 13.2%
Israel 6.9%
Lebanon 7.1%
Egypt 8.4%
Zimbabwe 0.9%
[FN]
*Total may not equal 100%.
Merrill Lynch Middle East/Africa Fund, Inc., August 31, 1998
DEAR SHAREHOLDER
For the three-month period ended August 31, 1998, total returns for
Merrill Lynch Middle East/Africa Fund, Inc.'s Class A, Class B,
Class C and Class D Shares were -25.97%, -26.23%, -26.20% and
- -26.09%, respectively. (Investment results shown do not reflect sales
charges and would be lower if sales charges were included. Complete
performance information can be found on pages 4 and 5 of this report
to shareholders.)
The unmanaged Morgan Stanley Capital International Indexes (MSCI)
for the largest equity markets in the region--Israel, South Africa
and Turkey--registered returns of -14.50%, -47.60% and -34.48%,
respectively, for the three months ended August 31, 1998. In
addition, the unmanaged J.P. Morgan Securities South African Bond
Index declined 36.06% (in US dollars) for the same three-month
period. (References to securities markets of all countries in this
letter to shareholders correspond to those countries' market
weightings in the MSCI Emerging Markets Free Index, unless otherwise
noted.) Detrimental to the Fund's performance during the quarter was
its exposure in Turkey. Beneficial to performance were the Fund's
investments in Morocco (10% of Fund net assets at August quarter-
end); its underweighted exposure to the South African bond market;
and its high cash position (38.1% of net assets at the close of the
August quarter).
Investment Review and Activities
During the past three months, both emerging and developed capital
markets worldwide declined at double-digit rates. During this
period, several developments pointing to a rapid deterioration in
the world's economic performance coincided to deliver blows to
nearly all markets. The MSCI World Index, a proxy for the US and
international stock markets combined, declined 11.38% for the three-
month period and 13.32% for the month of August. Among the key
developments that created a mood of crisis were the currency
devaluation and unstable politics in Russia, the deflationary
pressures on US corporate earnings, and the absence of recovery in
the Japanese and other Asian economies. The ensuing volatility in
markets heightened investor concern about the risk of further
currency devaluations.
Whereas in the past some of the markets in the Middle East/Africa
region had managed to escape the emerging markets declines, the
August quarter put an end to this phenomenon. With the exception of
the Moroccan stock market, all of the other markets experienced
double-digit declines.
The South African market (down 47.6% for the August quarter) was
especially hard-hit. During the quarter, we became concerned about
the near-term outlook for this market, and as a result we
considerably reduced our exposure there. Among the issues we
considered were the high interest rate environment, the weakening
rand, the negative investor sentiment caused by the announcement of
the new central bank governor, and the contagion effect of the
Russian turmoil. By August quarter-end, our holdings in South Africa
were approximately 8.8% of the Fund's net assets.
With world commodity prices continuing to fall, the South African
equity market is a natural target for falling share prices because
of the importance of South African mining companies in the stock
market's market capitalization and to economic activity overall.
Furthermore, with the global concerns about devaluing currencies,
interest rates are now expected to remain high to stabilize the
rand. The high interest rate environment will likely take a heavy
toll on the financial services sector in the form of a higher
default rate, weaker margins and slower loan growth, thus reducing
the attraction of one of the best-performing sectors in South Africa
during the past year. During the August quarter, the Johannesburg
Stock Exchange All-Share Index reached its lowest level since early
1994.
Our Israeli holdings represented 6.9% of net assets. This market
declined by 14.5% for the August quarter, with the month of August
showing a particularly steep decline of more than 12%. Once again,
the main cause of this decline was the emerging markets contagion
while the underlying fundamentals of the Israeli economy remain
strong. These fundamentals include a low level of foreign currency-
denominated short-term debt, a low budget deficit/gross domestic
product ratio, little reliance on commodity exports, and a
relatively strong foreign exchange reserve position. However, recent
figures indicate that the unemployment rate reached 9.4%. Concerns
over Russia and other emerging markets resulted in pressure on the
Israeli shekel during the August quarter as both local and foreign
investors fled the equity market.
In the past, the Turkish market had performed independently of the
rest of the countries in the region. However, during the August
quarter it was not spared the damage from the global market turmoil
and declined by 34.5%. Interest rates in Turkey increased by 12%
during the quarter. This was despite the fact that inflation in
Turkey continued on its downward path because investors anticipated
a weaker economic outlook as trade with Russia, an important trading
partner, declined.
However, there were several positive developments on Turkey's
domestic side. First was the government's advancement of the
privatization program with the bidding for the block sale of Petrol
Ofisi. The privatization program is seen as crucial if Turkey is to
meet the budget deficit targets under its agreement with the
International Monetary Fund. Another positive development was
Standard & Poor's Corporation's recognition of the improving
fundamentals of the Turkish economy when it affirmed the country's
single B foreign currency long-term sovereign credit rating and
revised its outlook from stable to positive. Finally, some Turkish
companies, notably banks, experienced good earnings. One of the
Fund's major holdings in Turkey is Akbank T.A.S., one of the largest
private sector banks. Akbank reported impressive loan growth of 40%
in the first six months of 1998. Also, because of its high level of
capitalization, Akbank was able to cut its funding costs by entering
into syndicated loans during the quarter.
One of the smaller equity markets in the region, the Moroccan
market, was one of the few emerging markets to appreciate during the
August quarter. This market was up by 5.85% during the quarter, and
on a year-to-date basis is among the best-performing markets, having
appreciated by 35%. The Moroccan market was boosted as emerging
markets investors sought refuge in countries dominated by local
investors that have been little affected by the global turmoil,
especially after the crisis in Russia. Foreign investors account for
less than 10% of trading at the Casablanca Exchange, which is
reported to be the third largest by market value in Africa. Indeed,
the links between Morocco and Russia are scant, since Morocco's
major trading partners are France, the United States and Saudi
Arabia. Fuelling the positive sentiment toward Morocco was the
initial public offerings of two Moroccan insurance companies which
control approximately one-third of the Moroccan insurance market,
and which were the first insurance companies in the country to be
listed.
The Fund's holdings are equally divided between Banque Marocaine du
Commerce Exterieur (BMCE), one of the country's largest banks, and
Les Ciments de L'Oriental (Cior), the second-largest cement company.
BMCE had a 16% market share of assets at year-end 1997 and accounts
for 7% of the Casablanca Stock Exchange. It was also the first
Moroccan company to issue a global depositary receipt. The bank's
earnings are expected to benefit significantly from the newly
created financial subsidiaries in consumer finance, leasing and
merchant banking. As we highlighted in our May letter to
shareholders, Cior derives most of its sales from the domestic
cement market and has as a strategic partner the Swiss cement
company, Holderbank.
In Conclusion
The markets in the Middle East/Africa region were unable to escape
the negative sentiment and volatility surrounding emerging markets
during the August quarter. Two of the most liquid markets in the
region, South Africa and Turkey, were especially hard-hit. While the
tiny market of Morocco was able to rise during the August quarter
and isolate itself from external forces, it is not at all certain
that this will continue in the coming months. For this reason, we
would remind our shareholders of the cyclical nature, illiquidity
and high risk of investing in emerging markets, and stress that
investing in these markets requires a long-term view.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Grace Pineda)
Grace Pineda
Senior Vice President and
Portfolio Manager
September 30, 1998
Merrill Lynch Middle East/Africa Fund, Inc., August 31, 1998
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 5.25% and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible
investors.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after approximately 8 years. (There is no initial
sales charge for automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 5.25% and
an account maintenance fee of 0.25% (but no distribution fee).
Any class of shares redeemed during the first 12 months after
purchase will be charged a redemption fee of 2.0%.
None of the past results shown should be considered a represen-
tation of future performance. Figures shown in the "Recent
Performance Results" and "Average Annual Total Return" tables assume
reinvestment of all dividends and capital gains distributions at net
asset value on the ex-dividend date. Investment return and principal
value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Dividends paid to each
class of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/98 -9.43% -15.84%
Inception (12/30/94) through 6/30/98 +4.69 + 3.09
[FN]
*Maximum sales charge is 5.25%. Maximum redemption fee is 2% and is
reduced to 0% after 1 year.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/98 -10.48% -15.64%
Inception (12/30/94) through 6/30/98 + 3.56 + 3.30
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years. Maximum redemption fee is 2% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 6/30/98 -10.39% -12.98%
Inception (12/30/94) through 6/30/98 + 3.68 + 3.68
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year. Maximum redemption fee is 2% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 6/3098 -9.66% -16.05%
Inception (12/30/94) through 6/30/98 +4.40 + 2.80
[FN]
*Maximum sales charge is 5.25%. Maximum redemption fee is 2% and is
reduced to 0% after 1 year.
**Assuming maximum sales charge.
<TABLE>
Recent
Performance
Results*
<CAPTION>
12 Month 3 Month Since Inception
Total Return Total Return Total Return
<S> <C> <C> <C>
ML Middle East/Africa Fund, Inc. Class A Shares -25.71% -25.97% -3.19%
ML Middle East/Africa Fund, Inc. Class B Shares -26.52 -26.23 -6.90
ML Middle East/Africa Fund, Inc. Class C Shares -26.50 -26.20 -6.60
ML Middle East/Africa Fund, Inc. Class D Shares -25.93 -26.09 -4.17
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date. The
Fund's inception date is 12/30/94.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Percent of
AFRICA Industries Shares Held Investments Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
Botswana Multi-Industry 106,802 Sechaba Breweries Ltd. $ 85,845 $ 129,465 2.5%
Total Investments in Botswana 85,845 129,465 2.5
Ghana Beverages & Tobacco 432,827 Guiness Ghana Ltd. 70,100 213,183 4.1
Total Investments in Ghana 70,100 213,183 4.1
Morocco Banking 3,428 Banque Marocaine du Commerce
Exterieure (BMCE) (GDR)(b) 116,045 260,531 5.0
Building Materials 2,000 Les Ciments de L'Oriental (Cior) 87,576 258,340 5.0
Total Investments in Morocco 203,621 518,871 10.0
South Africa Banking 3,137 Nedcor Ltd. (GDR)(b) 59,955 40,767 0.8
Beverages 10,447 South African Breweries Ltd. 304,104 147,255 2.9
Insurance 40,801 FirstRand Limited 35,721 36,858 0.7
3,654 Liberty Life Association
of Africa Ltd. 94,623 42,684 0.8
---------- --------- ------
130,344 79,542 1.5
Merchandising 34,620 Pick'n Pay Stores Ltd. 39,456 26,961 0.5
1,543 Pick'n Pay Stores Ltd. (N Shares) 2,474 1,021 0.0
---------- --------- ------
41,930 27,982 0.5
Metals--Non-Ferrous 21,896 Gencor Limited 54,273 31,887 0.6
22,571 Gencor Limited (ADR)(a) 55,535 33,019 0.7
---------- --------- ------
109,808 64,906 1.3
Mining 1,370 Gold Fields of South Africa Ltd. 35,013 11,309 0.2
Retail 115,934 Metro Cash & Carry Ltd. 101,965 51,462 1.0
13,494 Pepkor Ltd. (Ordinary) 63,713 32,682 0.6
---------- --------- ------
165,678 84,144 1.6
Total Investments in South Africa 846,832 455,905 8.8
Zimbabwe Beverages & Tobacco 65,844 Delta Corporation 42,000 21,120 0.4
Entertainment & 190,974 Zimbabwe Sun International 73,404 12,612 0.2
Leisure
Real Estate 55,667 Hippo Valley Estates 21,630 13,129 0.3
Total Investments in Zimbabwe 137,034 46,861 0.9
Total Investments in Africa 1,343,432 1,364,285 26.3
</TABLE>
Merrill Lynch Middle East/Africa Fund, Inc., August 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
MIDDLE Shares Percent of
EAST Industries Held Investments Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
Egypt Banking 6,643 Commercial International Bank
(Egypt) S.A.E. (CIB) $ 60,437 $ 53,261 1.0%
9,100 Commercial International Bank
(Egypt) S.A.E. (CIB) (GDR)(b) 185,500 66,203 1.3
---------- --------- ------
245,937 119,464 2.3
Beverages 5,618 Al-Ahram (Pyramids) Beverages
(GDR)(b) 87,079 148,034 2.8
Finance 10,000 EFG--Hermes Holding S.A.E. 117,500 117,500 2.3
Housing 1,270 Nasr City Company For Housing &
Reconstruction 27,807 52,933 1.0
Total Investments in Egypt 478,323 437,931 8.4
Israel Drugs 1,707 Teva Pharmaceutical Industries
Ltd. (ADR)(a) 62,579 61,132 1.2
Food Chain 20,607 Supersol Ltd. 55,496 56,767 1.1
Merchandising 17,458 Blue Square Chain Stores Properties
and Investments Ltd. 95,151 238,848 4.6
Total Investments in Israel 213,226 356,747 6.9
Lebanon Banking 6,300 Banque Audi (GDR)(b) 182,700 153,405 3.0
12,000 Banque Libanaise (GDR)(b) 145,500 212,400 4.1
Total Investments in Lebanon 328,200 365,805 7.1
Turkey Banking 7,397,500 Akbank T.A.S. (Ordinary) 199,072 136,077 2.6
3,828,952 Turkiye Garanti Bankasi A.S. 168,912 89,768 1.7
7,679,100 Yapi Ve Kredi Bankasi A.S. 110,467 144,026 2.8
---------- --------- ------
478,451 369,871 7.1
Building & 2,881,856 Adana Cimento Sanayii (Class A) 24,088 54,051 1.0
Construction
Building Products 9,115,265 Akcansa Cimento T.A.S. 274,573 151,236 2.9
Retail 135,800 Migros Turk T.A.S. 142,888 112,656 2.2
Total Investments in Turkey 920,000 687,814 13.2
Total Investments in the Middle East 1,939,749 1,848,297 35.6
SHORT-TERM Face
SECURITIES Amount
US Government US$ 821,000 Federal Home Loan Bank, 5.70%
Agency due 9/01/1998 821,000 821,000 15.9
Obligations* 800,000 Federal Home Loan Mortgage
Corp., 5.70% due 9/01/1998 800,000 800,000 15.4
Total Investments in
Short-Term Securities 1,621,000 1,621,000 31.3
Total Investments $4,904,181 4,833,582 93.2
==========
Other Assets Less Liabilities 353,925 6.8
---------- ------
Net Assets $5,187,507 100.0%
========== ======
Net Asset Value: Class A--Based on net assets of $662,054
and 80,948 shares outstanding $ 8.18
==========
Class B--Based on net assets of $3,464,440
and 426,235 shares outstanding $ 8.13
==========
Class C--Based on net assets of $380,591
and 46,769 shares outstanding $ 8.14
==========
Class D--Based on net assets of $680,422
and 83,397 shares outstanding $ 8.16
==========
(a)American Depositary Receipts (ADR).
(b)Global Depositary Receipts (GDR).
*Certain US Govenment Agency Obligations are traded on a discount
basis; the interest rate shown reflects the discount rate paid at
the time of purchase by the Fund.
</TABLE>
PORTFOLIO INFORMATION
As of August 31, 1998
Percent of
Ten Largest Holdings (Equity Investments) Net Assets
Banque Marocaine du Commerce Exterieure
(BMCE) (GDR) 5.0%
Les Ciments de L'Oriental (Cior) 5.0
Blue Square Chain Stores Properties and
Investments Ltd. 4.6
Guiness Ghana Ltd. 4.1
Banque Libanaise (GDR) 4.1
Banque Audi (GDR) 3.0
Akcansa Cimento A.S. 2.9
South African Breweries Ltd. 2.9
Al-Ahram (Pyramids) Beverages (GDR) 2.8
Yapi Ve Kredi Bankasi A.S. 2.8
Percent of
Ten Largest Industries Net Assets
Banking 22.3%
Beverages 5.7
Merchandising 5.1
Building Materials 5.0
Beverages & Tobacco 4.5
Retail 3.8
Building Products 2.9
Multi-Industry 2.5
Finance 2.3
Insurance 1.5
EQUITY PORTFOLIO CHANGES
For the Quarter Ended August 31, 1998
Additions
EFG--Hermes Holding S.A.E.
Migros Turk T.A.S.
Teva Pharmaceutical Industries Ltd. (ADR)
Turkiye Garanti Bankasi A.S.
Deletions
Anglo American Corp. of South Africa, Ltd.
(ADR)
Bank Hapoalim, Ltd.
Bank Leumi Le-Israel
Billiton PLC
Billiton PLC (ADR)
De Beers Centenary AG
Johnnies Industrial Corp., Ltd.
Nasionale Pers Beperk
Northern Electric Telekomunikasyon A.S.
(NETAS)
Paints & Chemicals Industries
(PACHIN)(GDR)
Rembrandt Controlling Investments Ltd.
Rembrandt Group Ltd.
Sasol Ltd.
Torah Portland Cement Company, Egypt
