MERRILL LYNCH
MIDDLE EAST/
AFRICA FUND, INC.
FUND LOGO
Quarterly Report
February 28, 1999
Officers and Directors
Terry K. Glenn, President and Director
Donald Cecil, Director
Roland M. Machold, Director
Edward H. Meyer, Director
Charles C. Reilly, Director
Richard R. West, Director
Arthur Zeikel, Director
Edward D. Zinbarg, Director
Grace Pineda, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Phillip Gillespie, 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
February 28, 1999
A map illustrating the following percentages:
GHANA 5.0%
MOROCCO 10.1%
SOUTH AFRICA 27.6%
BOTSWANA 2.9%
TURKEY 6.9%
ISRAEL 11.8%
LEBANON 7.8%
EGYPT 10.7%
ZIMBABWE 1.0%
[FN]
*Total may not equal 100%.
Merrill Lynch Middle East/Africa Fund, Inc., February 28, 1999
DEAR SHAREHOLDER
During the three-month period ended February 28, 1999, total returns
for Merrill Lynch Middle East/Africa Fund, Inc.'s Class A, Class B,
Class C and Class D Shares were +9.29%, +9.00%, +8.99% and +9.20%,
respectively. The unmanaged Morgan Stanley Capital International
(MSCI) Indexes for the largest equity markets in the region--Israel,
South Africa and Turkey--registered returns of +7.61%, -3.97% and
+31.55%, respectively, 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.) In addition, the unmanaged J.P.
Morgan Securities South African Bond Index rose 3.35% in US dollars
for the quarter ended February 28, 1999. The Fund's performance
benefited from its underweighted position in South Africa and its
overweighted position in Turkey. In addition, the Fund benefited
from its exposure to Egypt, Ghana and Morocco, although these
countries are not included in the Index.
Investment Overview
During the past three months, Middle East and African markets were
resilient as yet another emerging market currency, the Brazilian
real, devalued and a number of emerging markets in Asia and Latin
America declined sharply. An attractive feature of markets in the
Middle East and African regions has traditionally been a low
sensitivity to external developments, but this has not been evident
recently. Over the past year, the crises that erupted in developing
countries worldwide have exaggerated investors' perception of
emerging market risk, and have led to indiscriminate selling of
investments in this asset class. Thus, the stock markets in Turkey
and South Africa corrected sharply when the Russian currency
devalued and recovered with other emerging markets in the fall of
1998.
During the February quarter, domestic developments (not external
ones) again played a primary role in driving the performance of
Middle East and African markets. In Turkey, local political and
economic issues were particularly important in lowering the risk
premium attributed to the country and fueling the 31.55% rally in
its stock market. The capture of Abdullah Ocalan, the rebel Kurdish
leader sought by the Turkish Army for more than a decade, gave a
boost to the ruling parties, and raised hopes of greater political
stability and policy continuity. Stable macroeconomic variables,
especially inflation, were encouraging as was a statement by the
International Monetary Fund of its willingness to provide a credit
facility. These developments were critical in enabling interest
rates to decline. They are also timely because the amount of debt
that the Turkish Treasury needs to roll over is substantial and
likely to rise in the coming months.
Many Turkish companies--both banks and non-banks--invest in Turkish
treasury bills. Thus, the value of their investment portfolios rises
as interest rates decline. Given the high prevailing interest rates
in Turkey, there is still scope for a significant decline in
interest rates. Migros Turk T.A.S., a Fund holding, is the largest
supermarket retailer with approximately 28% market share. Aside from
its retailing expertise, Migros also benefits from a highly
favorable working capital position; that is, the company receives
payments from its customers more rapidly than it pays its suppliers.
Migros' expertise in retailing and cash management has enabled the
company to continually expand its presence in the market without
having a negative impact on earnings. The company's ability to
generate large cash flows enables it to diminish earnings
volatility. We deem this to be a critical advantage because we
expect Turkish economic conditions to continue to be sluggish in the
near term.
There appears to be a major shift in South African monetary policy
that has driven the market to perform relatively well in the past
three months, despite volatility in the external environment. Prior
to 1999, the overriding monetary policy objective was to maintain a
stable currency. Since the beginning of the year, the policy appears
to have shifted to a more growth-oriented strategy. Interest rates
have declined over 240 basis points (2.40%) in the past three
months. Surprisingly, the South African rand has remained fairly
stable during this period, an indication of foreign capital inflows.
We believe this attests to investor recognition of the reasonably
attractive fundamentals of the South African economy and companies,
and to the growing interest of investors in commodity stocks.
One of the Fund's largest positions is in Nampak Limited, the
premier South African packaging company. Nampak is a good example
of the ideal investment opportunity in these markets, in our view.
Nampak dominates the South African packaging industry with significant
market positions in all areas. The company possesses one of the
strongest management teams in the country. Its cost structure is in
line with international packaging companies, despite the lower
economies of scale in the South African and other African markets
that Nampak serves. The stock price plunged as interest rates were
hiked in May and June of 1998 to defend the rand. While the high
interest rates and slowdown in the economy have limited Nampak's
growth in the short term, it has hurt its smaller competitors much
more severely. Weak competitors are exiting the business, leading to
a consolidation in segments of the packaging industry in South
Africa. From its strong balance sheet perspective, Nampak is taking
advantage of this consolidation by acquiring capacity at reduced
prices. Ultimately, the loss of marginal players in the packaging
industry will lead to a more rational market and greater
profitability for Nampak, in our view. In the short term, we expect
that the company will benefit from cost savings generated from
rationalizing its acquisitions. We foresee the company's growth
prospects improving over the short to intermediate term as interest
rates decline.
A large number of Israeli technology companies are traded on the
National Association of Securities Dealers Automated Quotations
market in the United States. Among these companies is ECI Telecom
Limited. ECI Telecom produces telecommunication equipment for sale
to the major telecommunication service providers in the world. It is
a smaller niche player, compared to Lucent Technologies, Inc. and
Northern Telecom Limited, and is therefore able to target specific
markets that have significant profit potential. ECI recently
acquired Tadiran Telecom, another Israeli telecom provider, whose
wireless local loop technology is highly competitive on a global
basis. We expect the addition of these new products and additional
sales force to expand ECI's customer base. ECI shares trade at a
significant discount to the company's North American competitors. On
a price/earnings basis, ECI stands at 16 times 1999 earnings
estimates, whereas Lucent is trading at 46 times and Northern
Telecom is trading at 28 times. While ECI's product line is more
limited than that of these two larger competitors, we believe the
difference appears to be greater than justified by the actual
differences among these companies.
In Conclusion
This February quarter has proven once again how volatile Middle East
and African markets can be. We see value throughout the region with
security valuations comparing favorably to those elsewhere in the
world. However, we would like to remind shareholders that because of
the volatility, there may be periods of downturns. Therefore,
investing in these markets requires a long-term view.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Grace Pineda)
Grace Pineda
Senior Vice President and
Portfolio Manager
March 31, 1999
After more than 20 years of service, Arthur Zeikel recently retired
as Chairman of Merrill Lynch Asset Management, L.P. (MLAM). Mr.
Zeikel served as President of MLAM from 1977 to 1997 and as Chairman
since December 1997. Mr. Zeikel is one of the country's most
respected leaders in asset management and presided over the growth
of Merrill Lynch's asset management business. During his tenure,
client assets under management grew from $300 million to over $500
billion. Mr. Zeikel will remain on Merrill Lynch MiddleEast/Africa
Fund, Inc.'s Board of Directors. We are pleased to announce that
Terry K. Glenn has been elected President and Director of the Fund.
Mr. Glenn has held the position of Executive Vice President of MLAM
since 1983.
Mr. Zeikel's colleagues at MLAM join the Fund's Board of Directors
in wishing him well in his retirement from Merrill Lynch and are
pleased that he will continue as a member of the Fund's Board of
Directors.
Merrill Lynch Middle East/Africa Fund, Inc., February 28, 1999
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 representation
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 12/31/98 -21.59% -27.19%
Inception (12/30/94) through 12/31/98 - 0.72 - 2.04
[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 12/31/98 -22.42% -27.02%
Inception (12/30/94) through 12/31/98 - 1.77 - 1.77
[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 12/31/98 -22.40% -24.71%
Inception (12/30/94) through 12/31/98 - 1.69 - 1.69
[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 12/31/98 -21.80% -27.38%
Inception (12/30/94) through 12/31/98 - 1.00 - 2.32
[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 -17.22% +9.29% +5.80%
ML Middle East/Africa Fund, Inc. Class B Shares -18.15 +9.00 +1.23
ML Middle East/Africa Fund, Inc. Class C Shares -18.13 +8.99 +1.55
ML Middle East/Africa Fund, Inc. Class D Shares -17.59 +9.20 +4.52
<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 Limited $ 85,845 $ 116,836 2.9%
Total Investments in Botswana 85,845 116,836 2.9
Ghana Beverages & Tobacco 432,827 Guinness Ghana Limited 70,100 200,467 5.0
Total Investments in Ghana 70,100 200,467 5.0
Morocco Banking 2,642 Banque Marocaine du Commerce Exterieur 88,450 205,124 5.1
Building Materials 1,624 Cimenterie de l'Oriental (CIOR) 71,111 198,881 5.0
Total Investments in Morocco 159,561 404,005 10.1
South Africa Banking 3,137 Nedcor Limited 59,955 63,499 1.6
6,730 Nedcor Limited 135,377 136,340 3.4
1,318 Standard Bank Investment
Corporation Limited 3,649 3,747 0.1
---------- ---------- ------
198,981 203,586 5.1
Computers 4,570 Dimension Data Holdings Limited 20,779 18,605 0.5
Forest Products 105,399 Nampak Limited 158,247 201,774 5.1
Gold Mines 6,642 AngloGold Limited (ADR)(a) 144,561 120,386 3.0
Insurance 103,732 FirstRand Limited 101,553 109,765 2.7
1,622 Liberty Life Association of
Africa Limited 21,992 22,352 0.6
7,620 Sanlam Limited 8,034 5,441 0.1
---------- ---------- ------
131,579 137,558 3.4
Merchandising 34,620 Pick'n Pay Stores Limited 39,456 43,680 1.1
1,543 Pick'n Pay Stores Limited 'N' 2,474 1,832 0.0
---------- ---------- ------
41,930 45,512 1.1
Metals--Non-Ferrous 21,896 Gencor Limited 54,273 50,230 1.3
22,571 Gencor Limited (ADR)(a) 55,535 51,737 1.3
---------- ---------- ------
109,808 101,967 2.6
Mining 2,127 Gold Fields Ltd. 15,756 11,408 0.3
1,370 Gold Fields of South Africa Limited 16,536 2,169 0.0
---------- ---------- ------
32,292 13,577 0.3
Retail 820 Edgars Stores Limited 2,611 3,497 0.1
143,144 Metro Cash and Carry Limited 117,026 109,844 2.7
34,134 Pepkor Limited 128,913 146,131 3.7
---------- ---------- ------
248,550 259,472 6.5
Total Investments in South Africa 1,086,727 1,102,437 27.6
</TABLE>
Merrill Lynch Middle East/Africa Fund, Inc., February 28, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
AFRICA Shares Percent of
(concluded) Industries Held Investments Cost Value Net Assets
<S> <S> <C> <S>
Zimbabwe Beverages & Tobacco 65,844 Delta Corporation Limited $ 42,000 $ 14,220 0.4%
Entertainment & 190,974 Zimbabwe Sun Limited 73,404 10,999 0.3
Leisure
Real Estate 55,667 Hippo Valley Estates Ltd. 21,630 12,824 0.3
Total Investments in Zimbabwe 137,034 38,043 1.0
Total Investments in Africa 1,539,267 1,861,788 46.6
MIDDLE
EAST
Egypt Banking 6,643 Commercial International Bank 60,437 72,144 1.8
9,100 Commercial International Bank
(GDR)(b) 185,500 96,915 2.4
----------- ----------- ------
245,937 169,059 4.2
Beverages 3,903 Al-Ahram Beverages Company
S.A.E. (GDR)(b) 60,497 134,654 3.4
Finance 6,510 EFG-Hermes Holding, S.A.E. (GDR)(b) 76,493 79,748 2.0
Housing 1,270 Madinet Nasr for Housing &
Development Company 27,807 45,580 1.1
Total Investments in Egypt 410,734 429,041 10.7
Israel Banking 34,000 Bank Hapoalim 66,290 65,962 1.7
43,800 Bank Leumi Le-Israel 66,077 65,357 1.6
----------- ----------- ------
132,367 131,319 3.3
Drugs 953 Teva Pharmaceutical Industries
Ltd. (ADR)(a) 35,321 38,537 1.0
Food Chain 38,296 Supersol Ltd. 97,702 97,230 2.4
Merchandising 6,641 Blue Square Chain Investments
and Properties Ltd. 36,113 85,455 2.1
Telecommunications 3,226 ECI Telecom Limited 125,459 118,354 3.0
Total Investments in Israel 426,962 470,895 11.8
Lebanon Banking 7,227 Banque Audi (GDR)(b) 206,570 154,658 3.9
10,262 Banque Libanaise 124,123 156,495 3.9
Total Investments in Lebanon 330,693 311,153 7.8
Turkey Banking 7,558,336 Yapi ve Kredi Bankasi A.S. 83,793 132,236 3.3
Retail 109,397 Migros Turk T.A.S. 112,031 142,002 3.6
Total Investments in Turkey 195,824 274,238 6.9
Total Investments in the Middle East 1,364,213 1,485,327 37.2
SHORT-TERM Face
SECURITIES Amount
US Government US$ 302,000 Federal Home Loan Mortgage
Agency Obligations* Corporation, 4.70% due 3/01/1999 301,921 301,921 7.6
Total Investments in
Short-Term Securities 301,921 301,921 7.6
Total Investments $3,205,401 3,649,036 91.4
==========
Other Assets Less Liabilities 344,764 8.6
---------- ------
Net Assets $3,993,800 100.0%
========== ======
Net Asset Value: Class A--Based on net assets of $527,680 and
59,039 shares outstanding $ 8.94
==========
Class B--Based on net assets of $2,797,266 and
316,586 shares outstanding $ 8.84
==========
Class C--Based on net assets of $277,609 and
31,383 shares outstanding $ 8.85
==========
Class D--Based on net assets of $391,245 and
43,941 shares outstanding $ 8.90
==========
<FN>
*Certain US Government 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.
(a)American Depositary Receipts (ADR).
(b)Global Depositary Receipts (GDR).
</TABLE>
PORTFOLIO INFORMATION
As of February 28, 1999
Percent of
Ten Largest Holdings (Equity Investments) Net Assets
Banque Marocaine du Commerce Exterieur 5.1%
Nampak Limited 5.1
Guinness Ghana Limited 5.0
Nedcor Limited* 5.0
Cimenterie de l'Oriental (CIOR) 5.0
Banque Libanaise 3.9
Banque Audi (GDR) 3.9
Pepkor Limited 3.7
Migros Turk T.A.S. 3.6
Al-Ahram Beverages Company S.A.E. (GDR) 3.4
Percent of
Ten Largest Industries Net Assets
Banking 28.8%
Retail 10.1
Beverages & Tobacco 5.4
Forest Products 5.1
Building Materials 5.0
Insurance 3.4
Beverages 3.4
Merchandising 3.2
Gold Mines 3.0
Telecommunications 3.0
[FN]
*Includes combined holdings.
EQUITY PORTFOLIO CHANGES
For the Quarter Ended February 28, 1999
Additions
AngloGold Limited (ADR)
Bank Hapoalim
Bank Leumi Le-Israel
Dimension Data Holdings Limited
ECI Telecom Limited
Edgars Stores Limited
Nampak Limited
Nedcor Limited
Deletions
Akcansa Cimento A.S.
South African Breweries Ltd.
Turkiye Garanti Bankasi A.S.
