UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-07694
---------------------------------------------
Morgan Stanley Emerging Markets Debt Fund, Inc.
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(Exact name of registrant as specified in charter)
1221 AVENUE OF THE AMERICAS 22ND FLOOR NEW YORK, NY 10020
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(Address of principal executive offices) (Zip code)
RONALD E. ROBISON
1221 AVENUE OF THE AMERICAS 34TH FLOOR NEW YORK, NY 10020
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(Name and address of agent for service)
Registrant's telephone number, including area code: 1-800-221-6726
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Date of fiscal year end: 12/31
--------------------------
Date of reporting period: 6/30/04
-------------------------
Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its
regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW, Washington, DC 20549-0609. The OMB has reviewed this collection of
information under the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Fund's semi-annual report transmitted to shareholders pursuant to Rule 30e-1
under the Investment Company Act of 1940 is as follows:
SEMI-ANNUAL REPORT
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
DIRECTORS JUNE 30, 2004
CHARLES A. FIUMEFREDDO JOSEPH J. MCALINDEN
MICHAEL BOZIC VICE PRESIDENT
EDWIN J. GARN
WAYNE E. HEDIEN BARRY FINK
JAMES F. HIGGINS VICE PRESIDENT
DR. MANUEL H. JOHNSON
JOSEPH J. KEARNS STEFANIE V. CHANG
MICHAEL NUGENT VICE PRESIDENT
FERGUS REID
AMY R. DOBERMAN
OFFICERS VICE PRESIDENT
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD JAMES W. GARRETT
TREASURER AND CHIEF
MITCHELL M. MERIN FINANCIAL OFFICER [MORGAN STANLEY LOGO]
PRESIDENT
MICHAEL J. LEARY
RONALD E. ROBISON ASSISTANT TREASURER MORGAN STANLEY
EXECUTIVE VICE PRESIDENT EMERGING MARKETS DEBT
AND PRINCIPAL EXECUTIVE MARY E. MULLIN FUND, INC.
OFFICER SECRETARY
INVESTMENT ADVISER
MORGAN STANLEY INVESTMENT MANAGEMENT INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
ADMINISTRATOR
JPMORGAN INVESTOR SERVICES COMPANY
73 TREMONT STREET
BOSTON, MASSACHUSETTS 02108
CUSTODIAN
JPMORGAN CHASE BANK
270 PARK AVENUE
NEW YORK, NEW YORK 10017
STOCKHOLDER SERVICING AGENT
AMERICAN STOCK TRANSFER & TRUST COMPANY
59 MAIDEN LANE
NEW YORK, New York 10030
1 (800) 278-4353
LEGAL COUNSEL
CLIFFORD CHANCE US LLP
31 WEST 52ND STREET
NEW YORK, NEW YORK 10019
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
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 OR
VISIT OUR WEBSITE AT
www.morganstanley.com/im. MORGAN STANLEY
INVESTMENT MANAGEMENT INC.
(C) 2004 MORGAN STANLEY INVESTMENT ADVISER
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
LETTER TO STOCKHOLDERS
Overview
PERFORMANCE
For the six months ended June 30, 2004, the Morgan Stanley Emerging Markets Debt
Fund, Inc. (the "Fund") had a total return, based on net asset value per share
of -3.06%, compared to -2.27% for the J.P. Morgan Emerging Markets Bond Index
Global (the "Index"). On June 30, 2004, the closing price of the Fund's shares
on the New York Stock Exchange was $8.28, representing a 13.2% discount to the
Fund's net asset value per share.
FACTORS AFFECTING PERFORMANCE
- The spectre of higher interest rates in the U.S. triggered an unwinding of
the so-called "carry trade", which led emerging market's spreads versus
U.S. Treasuries to widen to a high of 549 basis points in May, up from a
low of approximately 370 basis points in early January. This created a
somewhat oversold condition, and spreads subsequently narrowed to 482
basis points by the end of June.
- The Fund's performance benefited from an overweight in South Korea and
Indonesia, both of which provided a degree of stability during the spring
months when other areas of the market were in decline. An underweight in
Ecuadorian debt also helped relative performance.
- The Fund's overweight in Brazil early in the year detracted from
performance; however, this weighting was trimmed significantly during the
second quarter.
- An underweight posture with respect to Turkey also hurt the Fund's
performance. We believed that the country's debt was too high to justify
an aggressive weighting, but underestimated the positive influence of
prospective European Union membership on the country's fiscal management
and investor confidence.
MANAGEMENT STRATEGIES
- Going forward, we will continue to monitor the emerging markets and
overall investment climate closely, and employ a disciplined approach in
seeking to take advantage of opportunities as they arise.
- We believe the Fund continues to be appropriate for investors seeking to
add incremental income and an additional element of diversification to a
well-rounded portfolio.
Sincerely,
/s/ Ronald E. Robison
Ronald E. Robison
Executive Vice President--
Principal Executive Officer
July 2004
2
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
STATEMENT OF NET ASSETS
(SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENTS)
June 30, 2004 (unaudited)
FACE
AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------
DEBT INSTRUMENTS (98.8%)
ARGENTINA (2.7%)
SOVEREIGN (2.7%)
Republic of Argentina
2.438%, 3/31/23 $ (a)2,910 $ 1,542
6.00%, 3/31/23 (a)1,724 879
11.375%, 3/15/10 (a)420 126
11.375%, 1/30/17 (a)639 188
11.75%, 4/7/09 (a)4,530 1,314
11.75%, 6/15/15 (a)310 93
Republic of Argentina (Linked Variable Rate)
82.329%, 4/10/05 (a)(b)4,290 1,459
--------------------------------------------------------------------------
5,601
==========================================================================
BRAZIL (15.7%)
SOVEREIGN (15.7%)
Federative Republic of Brazil
6.00%, 4/15/24 (b)1,490 1,155
8.00%, 4/15/14 (c)11,528 10,613
8.875%, 4/15/24 4,435 3,615
11.00%, 8/17/40 5,690 5,370
11.25%, 7/26/07 4,120 4,460
14.50%, 10/15/09 6,360 7,441
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32,654
==========================================================================
BULGARIA (1.8%)
SOVEREIGN (1.8%)
Republic of Bulgaria
8.25%, 1/15/15 (d)1,699 1,984
Republic of Bulgaria (Registered)
8.25%, 1/15/15 1,490 1,739
--------------------------------------------------------------------------
3,723
==========================================================================
CHILE (2.2%)
CORPORATE (2.2%)
Empresa Nacional de Petroleo
61.75%, 11/15/12 (d)4,170 4,484
==========================================================================
COLOMBIA (1.6%)
SOVEREIGN (1.6%)
Republic of Colombia
9.75%, 4/9/11 2,987 3,315
==========================================================================
INDIA (0.0%)
CORPORATE (0.0%)
Surashtra Cement and Chemical Ltd.
19.00% (expired maturity) INR (a)(e)30,000 @--
==========================================================================
INDONESIA (2.8%)
CORPORATE (2.8%)
Pindo Deli Finance (Mauritius)
10.75%, 10/1/07 $ (a)(d)11,610 $ 3,106
Tjiwi Kimia Finance Mauritius Ltd.
10.00%, 8/1/04 (a)2,130 804
Tjiwi Kimia International Global Bond
13.25% (expired maturity) (a)4,990 1,884
--------------------------------------------------------------------------
5,794
==========================================================================
IRELAND (0.6%)
CORPORATE (0.6%)
TRAC- X EM Ltd.
6.50%, 12/23/08 (g)1,250 1,205
==========================================================================
IVORY COAST (0.1%)
SOVEREIGN (0.1%)
Republic of Ivory Coast
2.00%, 3/29/18 (a)2,045 317
==========================================================================
MALAYSIA (3.3%)
SOVEREIGN (3.3%)
Government of Malaysia
8.75%, 6/1/09 5,760 6,785
==========================================================================
MEXICO (20.4%)
CORPORATE (7.6%)
Pemex Project Funding Master Trust
2.82%, 6/15/10 (b)(d)4,250 4,280
9.125%, 10/13/10 4,040 4,646
Petroleos Mexicanos
9.50%, 9/15/27 2,700 3,105
Petroleos Mexicanos (Registered)
8.625%, 12/1/23 1,740 1,801
Satelites Mexicanos SA de CV, 'B'
10.125%, 11/1/04 (a)4,533 1,926
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15,758
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SOVEREIGN (12.8%)
United Mexican States
8.00%, 9/24/22 1,200 1,249
8.125%, 12/30/19 4,110 4,408
8.375%, 1/14/11 (c)10,210 11,563
10.375%, 2/17/09 1,510 1,828
11.375%, 9/15/16 2,620 3,668
11.50%, 5/15/26 2,820 3,961
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26,677
--------------------------------------------------------------------------
42,435
==========================================================================
The accompanying notes are an integral part of the financial statements. 3
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
STATEMENT OF NET ASSETS (CONT'D)
June 30, 2004 (unaudited)
FACE
AMOUNT VALUE
(000) (000)
--------------------------------------------------------------------------
NIGERIA (1.2%)
SOVEREIGN (1.2%)
Central Bank of Nigeria
6.25%, 11/15/20 $ (f)3,000 $ 2,580
--------------------------------------------------------------------------
PANAMA (1.7%)
SOVEREIGN (1.7%)
Republic of Panama
9.375%, 4/1/29 1,890 2,103
9.625%, 2/8/11 1,370 1,524
--------------------------------------------------------------------------
3,627
==========================================================================
PERU (2.4%)
SOVEREIGN (2.4%)
Republic of Peru
8.375%, 5/3/16 830 776
9.875%, 2/6/15 3,960 4,158
--------------------------------------------------------------------------
4,934
==========================================================================
PHILIPPINES (4.1%)
SOVEREIGN (4.1%)
Republic of Philippines
8.875%, 3/17/15 6,290 6,086
9.875%, 1/15/19 2,360 2,360
--------------------------------------------------------------------------
8,446
==========================================================================
QATAR (0.8%)
SOVEREIGN (0.8%)
State of Qatar (Registered)
9.75%, 6/15/30 1,260 1,744
==========================================================================
RUSSIA (21.8%)
SOVEREIGN (21.8%)
Russian Federation
5.00%, 3/31/30 (d)(f)4,684 4,301
Russian Federation (Registered)
5.00%, 3/31/30 (f)20,035 18,395
8.25%, 3/31/10 3,760 4,056
11.00%, 7/24/18 7,051 8,919
12.75%, 6/24/28 6,580 9,590
--------------------------------------------------------------------------
45,261
==========================================================================
SOUTH KOREA (5.6%)
CORPORATE (5.6%)
Citigroup Global Markets Holdings, Inc.
(South Korean Won Index Linked)
5.30%, 10/5/05 (d)11,450 11,636
==========================================================================
TUNISIA (0.4%)
SOVEREIGN (0.4%)
Banque Centrale de Tunisie
7.375%, 4/25/12 750 821
==========================================================================
TURKEY (5.3%)
SOVEREIGN (5.3%)
Republic of Turkey
11.00%, 1/14/13 $ 7,290 $ 7,983
11.50%, 1/23/12 2,700 3,037
--------------------------------------------------------------------------
11,020
==========================================================================
VENEZUELA (4.3%)
SOVEREIGN (4.3%)
Republic of Venezuela
9.25%, 9/15/27 3,280 2,788
10.75%, 9/19/13 (d)6,130 6,053
--------------------------------------------------------------------------
8,841
==========================================================================
TOTAL DEBT INSTRUMENTS
(Cost $209,996) 205,223
==========================================================================
NO. OF
WARRANTS
--------------------------------------------------------------------------
WARRANTS (0.0%)
NIGERIA (0.0%)
Central Bank of Nigeria,
expiring 11/15/20 (e)(h)8,750 @--
==========================================================================
VENEZUELA (0.0%)
Republic of Venezuela Oil-Linked
Payment Obligation,
expiring 4/15/20 (b)(h)11,350 @--
==========================================================================
TOTAL WARRANTS
(Cost $@--) @--
==========================================================================
FACE
AMOUNT
(000)
--------------------------------------------------------------------------
SHORT-TERM INVESTMENT (1.2%)
UNITED STATES (1.2%)
REPURCHASE AGREEMENT (1.2%)
J.P. Morgan Securities, Inc., 1.25%,
dated 6/30/04, due 7/1/04,
repurchase price $2,554
(Cost $2,554) $ (i)2,554 2,554
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4 The accompanying notes are an integral part of the financial statements.
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
STATEMENT OF NET ASSETS (CONT'D)
June 30, 2004 (unaudited)
VALUE
(000)
--------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(Cost $212,550) $ 207,777
==========================================================================
AMOUNT
(000)
--------------------------------------------------------------------------
OTHER ASSETS
Cash $ 1
Interest Receivable 4,215
Receivable for Investments Sold 3,096
Due from Broker 2,157
Foreign Currency
(Cost $54) 56
Other 13 9,538
==========================================================================
LIABILITIES
Payable For:
Dividends Declared (3,968)
Investments Purchased (2,300)
Reverse Repurchase
Agreements (282)
Investment Advisory Fees (175)
Directors' Fees and Expenses (51)
Administrative Fees (10)
Custodian Fees (4)
Other Liabilities (106) (6,896)
==========================================================================
NET ASSETS
Applicable to 22,046,881, issued and
outstanding $ 0.01 par value shares
(200,000,000 shares authorized) $ 210,419
==========================================================================
NET ASSET VALUE PER SHARE $ 9.54
==========================================================================
AT JUNE 30, 2004, NET ASSETS CONSISTED OF:
Common Stock $ 220
Paid-in Capital 279,066
Undistributed (Distributions in Excess of) Net
Investment Income 64
Accumulated Net Realized Gain (Loss) (63,722)
Unrealized Appreciation (Depreciation)
on Investments, Futures Contracts and Foreign
Currency Translations (5,209)
==========================================================================
TOTAL NET ASSETS $210,419
==========================================================================
(a) Security is in default.
(b) Variable/Floating Rate Security -- Interest rate changes on these
instruments are based on changes in designated base rates. The rates shown
are those in effect on June 30, 2004.
(c) Denotes all or a portion of securities subject to repurchase under the
Reverse Repurchase Agreements as of June 30, 2004. See note A-3 to
financial statements.
(d) 144A Security - Certain conditions for public sale may exist.
(e) Security was valued at fair value - At June 30, 2004, the Fund held
fair-valued securities, each valued at less than $500, representing less
than 0.05% of net assets.
(f) Step Bond - coupon rate increases in increments to maturity. Rate disclosed
is as of June 30, 2004. Maturity date disclosed is ultimate maturity.
(g) TRAC-X EM Ltd., acquired at a cost of $1,306,500, was formed by an
affiliate of the Adviser. During the six months ended June 30, 2004, there
were purchases and sales of this security of $3,148,600 and $1,811,177,
respectively. The Fund derived $44,140 of income from this security during
the six months ended June 30, 2004, before any applicable withholding
taxes.
(h) Non-income producing.
(i) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of this statement of
net assets. The investment in the repurchase agreement is through
participation in a joint account with affiliated funds.
@ Face Amount/Value is less than $500.
FUTURES CONTRACTS:
The Fund had the following futures contract(s) open at period end:
NET
UNREALIZED
NUMBER APPRECIATION
OF VALUE EXPIRATION (DEPRECIATION)
CONTRACTS (000) DATE (000)
----------------------------------------------------------------
SHORT:
5 Year U.S.
Treasury Note 474 $51,518 Sept-04 $ (383)
10 Year U.S.
Treasury Note 49 5,357 Sept-04 (60)
----------------------------------------------------------------
$ (443)
================================================================
The accompanying notes are an integral part of the financial statements. 5
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
FINANCIAL STATEMENTS
SIX MONTHS ENDED
JUNE 30, 2004
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
---------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest (net of $3 of foreign taxes withheld) $ 9,875
===========================================================================================================================
EXPENSES
Investment Advisory Fees 1,101
Interest Expense on Reverse Repurchase Agreements 61
Professional Fees 54
Administrative Fees 46
Stockholder Reporting Expenses 28
Custodian Fees 23
Stockholder Servicing Fees 8
Interest Expense 3
Other Expenses 27
===========================================================================================================================
TOTAL EXPENSES 1,351
===========================================================================================================================
NET INVESTMENT INCOME 8,524
===========================================================================================================================
NET REALIZED GAIN (LOSS) ON:
Investments 3,948
Futures 210
===========================================================================================================================
NET REALIZED GAIN (LOSS) 4,158
===========================================================================================================================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON:
Investments (20,573)
Foreign Currency Translations 2
Futures Contracts 461
===========================================================================================================================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (20,110)
===========================================================================================================================
NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (15,952)
===========================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (7,428)
===========================================================================================================================
SIX MONTHS ENDED
JUNE 30, 2004 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2003
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
---------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income $ 8 ,524 $ 16,955
Net Realized Gain (Loss) 4,158 24,891
Change in Unrealized Appreciation (Depreciation) (20,110) 14,196
===========================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (7,428) 56,042
===========================================================================================================================
Distributions from and/or in excess of:
Net Investment Income (7,937) (16,566)
===========================================================================================================================
TOTAL INCREASE (DECREASE) (15,365) 39,476
===========================================================================================================================
Net Assets:
Beginning of Period 225,784 186,308
===========================================================================================================================
END OF PERIOD (INCLUDING UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF) NET INVESTMENT
INCOME OF $64 AND $(523), RESPECTIVELY) $210,419 $225,784
===========================================================================================================================
6 The accompanying notes are an integral part of the financial statements
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
FINANCIAL STATEMENTS
SIX MONTHS ENDED
JUNE 30, 2004
(UNAUDITED)
STATEMENT OF CASH FLOWS (000)
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Proceeds from Sales and Maturities of Long-Term Investments $ 152,597
Purchases of Long-Term Investments (139,448)
Net (Increase) Decrease in Short-Term Investments (2,554)
Net Realized Gain (Loss) on Futures Contracts 210
Net Investment Income 8,524
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Net (Increase) Decrease in Receivables Related to Operations 992
Net Increase (Decrease) in Payables Related to Operations (11)
Accretion/Amortization of Discounts and Premiums (1,203)
---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities 19,107
===========================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Paid for Reverse Repurchase Agreements (9,158)
Cash Distributions Paid (9,953)
---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) for Financing Activities (19,111)
---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash (4)
CASH AT BEGINNING OF PERIOD 5
---------------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 1
===========================================================================================================================
The accompanying notes are an integral part of the financial statements. 7
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
SELECTED PER SHARE DATA AND RATIOS
Financial Highlights
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 -------------------------------------------------
(UNAUDITED) 2003 2002 2001 2000 1999
------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.24 $ 8.45 $ 8.25 $ 8.22 $ 8.36 $ 7.01
------------------------------------------------------------------------------------------------------------------
Net Investment Income 0.39+ 0.77+ 0.67+ 0.80 1.23 1.09
Net Realized and Unrealized Gain (Loss) on
Investments (0.73) 1.77 0.19 0.08 (0.29) 1.27
Total from Investment Operations (0.34) 2.54 0.86 0.88 0.94 2.36
------------------------------------------------------------------------------------------------------------------
Distributions from and/or in excess of:
Net Investment Income (0.36) (0.75) (0.66) (0.85) (1.08) (1.01)
------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.54 $ 10.24 $ 8.45 $ 8.25 $ 8.22 $ 8.36
==================================================================================================================
PER SHARE MARKET VALUE, END OF PERIOD $ 8.28 $ 9.76 $ 7.55 $ 7.40 $ 6.88 $ 6.81
==================================================================================================================
TOTAL INVESTMENT RETURN:
Market Value (11.73)%** 40.21% 11.11% 20.65% 16.49% 8.55%
Net Asset Value (1) (3.06)%** 31.44% 11.54% 12.50% 13.50% 36.58%
==================================================================================================================
RATIOS, SUPPLEMENTAL DATA:
------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) $210,419 $225,784 $186,308 $181,913 $181,134 $184,269
------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 1.23%* 1.25% 1.34% 1.61% 2.32% 2.28%
Ratio of Expenses Excluding Interest Expense to
Average Net Assets 1.16%* 1.20% 1.29% 1.41% 1.34% 1.35%
Ratio of Net Investment Income to Average Net
Assets 7.73%* 8.04% 8.11% 9.73% 14.31% 14.53%
Portfolio Turnover Rate 63%** 187% 149% 233% 272% 178%
------------------------------------------------------------------------------------------------------------------
(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
stockholder'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.
+ Per share amounts are based on average shares outstanding.
* Annualized
** Not Annualized
8 The accompanying notes are an integral part of the financial statements.
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
June 30, 2004 (unaudited)
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 (the "1940 Act"), 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. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with accounting principles generally accepted in the United States.
Such policies are consistently followed by the Fund in the preparation of its
financial statements. Accounting principles generally accepted in the United
States 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: Equity securities listed on a U.S. exchange are valued
at the latest quoted sales price on the valuation date. Equity securities
listed or traded on NASDAQ, for which market quotations are available, are
valued at the NASDAQ Official Closing Price. Securities listed on a foreign
exchange are valued at their closing price. Unlisted securities and listed
securities not traded on the valuation date for which market quotations are
readily available are valued at the mean between the current bid and asked
prices obtained from reputable brokers. Bonds and other fixed income
securities may be valued according to the broadest and most representative
market. In addition, bonds and other fixed income securities may be valued
on the basis of prices provided by a pricing service. The prices provided
by a pricing service take into account broker dealer market price
quotations for institutional size trading in similar groups of securities,
security quality, maturity, coupon and other security characteristics as
well as any developments related to the specific securities. Debt
securities purchased with remaining maturities of 60 days or less are
valued at amortized cost, if it approximates value.
All other securities and investments for which market values are not
readily available, including restricted securities, and those securities
for which it is inappropriate to determine prices in accordance with the
aforementioned procedures, are valued at fair value as determined in good
faith under procedures adopted by the Board of Directors, although the
actual calculations may be done by others. Factors considered in making
this determination may include, but are not limited to, information
obtained by contacting the issuer, analysts, or the appropriate stock
exchange (for exchange-traded securities), analysis of the issuer's
financial statements or other available documents and, if necessary,
available information concerning other securities in similar circumstances.
Most foreign markets close before the New York Stock Exchange (NYSE).
Occasionally, developments that could affect the closing prices of
securities and other assets may occur between the times at which valuations
of such securities are determined (that is, close of the foreign market on
which the securities trade) and the close of business on the NYSE. If these
developments are expected to materially affect the value of the securities,
the valuations may be adjusted to reflect the estimated fair value as of
the close of the NYSE, as determined in good faith under procedures
established by the Board of Directors.
2. REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements under
which the Fund lends excess cash and takes possession of securities with an
agreement that the counterparty will repurchase such securities. In
connection with transactions in repurchase agreements, a bank as custodian
for the Fund takes possession of the underlying securities (collateral),
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.
The Fund, along with other affiliated investment companies, may utilize a
joint trading account for the purpose of entering into one or more
repurchase agreements.
3. 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
9
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
June 30, 2004 (unaudited)
also involve credit risk with the counterparty 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 June 30, 2004, the Fund had reverse repurchase agreements outstanding
with Lehman Brothers as follows:
MATURITY IN
LESS THAN
365 DAYS
---------------------------------------------------------------------
Value of Securities Subject to Repurchase $ 281,000
Liability Under Reverse Repurchase
Agreement $ 282,000
Weighted Average Days to Maturity 6
The weighted average weekly balance of reverse repurchase agreements
outstanding during the six months ended June 30, 2004, was approximately
$6,832,000 at a weekly weighted average interest rate of 0.84%.
4. 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;
- 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) due to securities transactions
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) on foreign
currency translations for the period is reflected in the Statement of
Operations.
A significant portion of the Fund's net assets consist of securities of
issuers located in emerging markets or which are denominated in foreign
currencies. Such investments may be concentrated in a limited number of
countries and regions and may vary throughout the year. Changes in currency
exchange rates will affect the value of and investment income from foreign
currency denominated 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.
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 that the Fund has utilized
and their associated risks:
5. 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
10
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
June 30, 2004 (unaudited)
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.
6. 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 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.
7. FUTURES: The Fund may purchase and sell futures contracts. Futures
contracts provide for the sale by one party and purchase by another party
of a specified amount of a specified security, index, instrument or basket
of instruments. Futures contracts (secured by cash, government or other
liquid securities deposited with brokers or custodians as "initial margin")
are valued based upon their quoted daily settlement prices; changes in
initial settlement value (represented by cash paid to or received from
brokers as "variation margin") are accounted for as unrealized appreciation
(depreciation). When futures contracts are closed, the difference between
the opening value at the date of purchase and the value at closing is
recorded as realized gains or losses in the Statement of Operations.
The Fund may use futures contracts in order to manage its exposure to the
stock and bond markets, to hedge against unfavorable changes in the value
of securities or to remain fully invested and to reduce transaction costs.
Futures contracts involve market risk in excess of the amounts recognized
in the Statement of Net Assets. Risks arise from the possible movements in
security values underlying these instruments. The change in value of
futures contracts primarily corresponds with the value of their underlying
instruments, which may not correlate with the change in value of the hedged
investments. In addition, there is the risk that the Fund may not be able
to enter into a closing transaction because of an illiquid secondary
market.
8. OVER-THE-COUNTER TRADING: Securities and other derivative instruments that
may be purchased or sold by the Fund may 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.
9. 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 stockholders are recorded on the ex-dividend
date.
B. ADVISER: Morgan Stanley 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. ADMINISTRATOR: JPMorgan Chase & Co., through its corporate affiliate J.P.
Morgan Investor Services Co. (the "Administrator"), provides administrative
services to the Fund under an Administration Agreement. The Administrator is
paid a fee computed weekly and payable monthly at an annual rate of 0.02435% of
the Fund's average weekly net assets, plus $24,000 per annum. In addition, the
Fund is charged for certain out-of-pocket expenses incurred by the Administrator
on its behalf. An employee of the administrator is an Officer of the fund.
D. CUSTODIAN: JPMorgan Chase Bank and its affiliates serve as custodian for
the Fund. The Custodian holds cash, securities, and other assets of the Fund as
required by the 1940 Act. Custody fees are payable monthly based on assets held
in custody,
11
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
June 30, 2004 (unaudited)
investment purchases and sales activity and account maintenance fees, plus
reimbursement for certain out-of-pocket expenses.
E. FEDERAL INCOME 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 Federal income taxes is required in the financial
statements. Dividend income and distributions to stockholders are recorded on
the ex-dividend date.
The Fund may be subject to taxes imposed by countries in which it invests. Such
taxes are generally based on income and/or capital gains earned or repatriated.
Taxes are accrued and applied to net investment income, net realized gains and
net unrealized appreciation as such income and/or gains are earned.
The tax character of distributions paid may differ from the character of
distributions shown on the Statement of Changes in Net Assets due to short-term
capital gains being treated as ordinary income for tax purposes. The tax
character of distributions paid during 2003 and 2002 were as follows:
2003 DISTRIBUTIONS 2002 DISTRIBUTIONS
PAID FROM: PAID FROM:
(000) (000)
---------------------------------- -------------------------
LONG-TERM LONG-TERM
ORDINARY CAPITAL ORDINARY CAPITAL
INCOME GAIN INCOME GAIN
---------------------------------------------------------------
$16,566 $-- $14,551 $--
The amount and character of income and capital gain distributions to be paid by
the Fund are determined in accordance with Federal income tax regulations, which
may differ from accounting principles generally accepted in the United States.
The book/tax differences are considered either temporary or permanent in nature.
Temporary differences are attributable to differing book and tax treatments for
the timing of the recognition of gains and losses on certain investment
transactions and the timing of the deductibility of certain expenses.
Permanent book and tax basis differences may result in reclassifications among
undistributed (distributions in excess of) net investment income (or accumulated
net investment loss), accumulated net realized gain (loss) and paid-in capital.
At December 31, 2003, the components of distributable earnings on a tax basis
were as follows:
UNDISTRIBUTED UNDISTRIBUTED
ORDINARY INCOME LONG-TERM CAPITAL GAIN
(000) (000)
-------------------------------------------------------------
$176 $--
-------------------------------------------------------------
At June 30, 2004, the U.S. Federal income tax cost basis of securities was
approximately $212,550,000 and, accordingly, net unrealized depreciation for
U.S. Federal income tax purposes was $4,773,000 of which $7,449,000 related to
appreciated securities and $12,222,000 related to depreciated securities.
At December 31, 2003, the Fund had a capital loss carryforward for U.S. Federal
income tax purposes of approximately $69,415,000 available to offset future
capital gains, of which $52,822,000 will expire on December 31, 2006,
$13,135,000 will expire on December 31, 2007 and $3,458,000 will expire on
December 31, 2009.
To the extent that capital loss carryforwards are used to offset any future
capital gains realized during the carryover period as provided by U.S. Federal
income tax regulations, no capital gains tax liability will be incurred by the
Fund for gains realized and not distributed. To the extent that capital gains
are offset, such gains will not be distributed to the stockholders.
Net capital and currency losses incurred after October 31, and within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. For the year ended December 31, 2003, the Fund did not defer any
post-October losses to January 1, 2004, for U.S. Federal income tax purposes.
F. CONTRACTUAL OBLIGATIONS: The Fund enters into contracts that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts and expects the risk of loss to be remote.
G. OTHER: During the six months ended June 30, 2004, the Fund made purchases
and sales totaling approximately $141,748,000 and $155,623,000 respectively, of
investment securities other than long-term U.S. Government securities, purchased
options and short-term investments. There were no purchases or sales of
long-term U.S. Government securities.
These investments may be 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.
On June 21, 2004 the Officers of the Fund, pursuant to authority granted by the
Board of Directors declared a distribution of $0.18 per share, derived from net
investment income, payable on July 15, 2004, to stockholders of record on June
30, 2004.
12
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
June 30, 2004 (unaudited)
H. SUPPLEMENTAL PROXY INFORMATION:
The Annual Meeting of the Stockholders of the Fund was held on June 22, 2004.
The following is a summary of the proposal presented and the total number of
shares voted:
PROPOSAL:
1. To elect the following Directors:
VOTES IN VOTES
FAVOR OF AGAINST
-----------------------------------------------------------
Wayne E. Hedien 18,622,287 851,008
James F. Higgins 18,622,787 850,508
Dr. Manuel H. Johnson 18,622,787 850,508
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A copy of (1) the Fund's policies and procedures with respect to the voting of
proxies relating to the Fund's portfolio securities; and (2) how the Fund voted
proxies relating to portfolio securities during the most recent twelve-month
period ended June 30, 2004 is available without charge, upon request, by calling
1-800-548-7786 or by visiting our website at www.morganstanley.com/im. This
information is also available on the Securities and Exchange Commission's
website at www.sec.gov.
13
MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each stockholder will be deemed to have elected, unless American Stock Transfer
& Trust Company (the "Plan Agent") is otherwise instructed by the stockholder 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
stockholders 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 stockholders, such as banks, brokers or nominees, that 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
stockholder as representing the total amount registered in the stockholder's
name and held for the account of beneficial owners who are participating in the
Plan.
Stockholders 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 stockholders 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.
American Stock Transfer & Trust Company
Dividend Reinvestment and Cash Purchase Plan
59 Maiden Lane
New York, New York 10030
1-800-278-4353
14
ITEM 2. CODE OF ETHICS. Not applicable for semi-annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable for semi-annual
reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable for semi-annual
reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable for semi-annual
reports.
ITEM 6. [RESERVED.]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES. Not applicable for semi-annual reports.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS. Not Applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable.
ITEM 10. CONTROLS AND PROCEDURES.
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting.
ITEM 11. EXHIBITS.
(a) Code of Ethics - Not applicable for semi-annual reports.
(b) Certifications of Principal Executive Officer and Principal Financial
Officer attached hereto as part of EX-99.CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Morgan Stanley Emerging Markets Debt Fund, Inc.
By: /s/ Ronald E. Robison
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: August 19, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
By: /s/ Ronald E. Robison
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: August 19, 2004
By: /s/ James W. Garrett
Name: James W. Garrett
Title: Principal Financial Officer
Date: August 19, 2004