-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, ggVChV9nCf/5IN+KD4e/xZXtxY1Yt4lwqqTdelREY9YXNf3gW5+iiBPDpIfwAtxP y8801kIGZK2hCRgQaLqUcw== 0000912057-95-004475.txt : 19950619 0000912057-95-004475.hdr.sgml : 19950619 ACCESSION NUMBER: 0000912057-95-004475 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950608 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY EMERGING MARKETS DEBT FUND INC CENTRAL INDEX KEY: 0000904112 STANDARD INDUSTRIAL CLASSIFICATION: FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: 1940 Act SEC FILE NUMBER: 811-07694 FILM NUMBER: 95545914 BUSINESS ADDRESS: STREET 1: 73 TREMONT ST STREET 2: 8TH FLOOR CITY: BOSTON STATE: MA ZIP: 02108 BUSINESS PHONE: 6175578742 MAIL ADDRESS: STREET 1: 73 TREMONT ST STREET 2: 8TH FLOOR CITY: BOSTON STATE: MA ZIP: 02108 N-30B-2 1 N-30B-2 MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. --------------------------------------------- OFFICERS AND DIRECTORS Barton M. Biggs James W. Grisham CHAIRMAN OF THE BOARD VICE PRESIDENT OF DIRECTORS Harold J. Schaaff, Jr. Warren J. Olsen VICE PRESIDENT PRESIDENT AND DIRECTOR Joseph P. Stadler John A. Levin VICE PRESIDENT DIRECTOR Valerie Y. Lewis William G. Morton, Jr. SECRETARY DIRECTOR Hilary D. Toole Fergus Reid ASSISTANT SECRETARY DIRECTOR James R. Rooney Richard E. Salomon TREASURER DIRECTOR Timothy F. Osborne John H.T. Wilson ASSISTANT TREASURER DIRECTOR --------------------------------------------- INVESTMENT ADVISER Morgan Stanley Asset Management Inc. 1221 Avenue of the Americas New York, New York 10020 -------------------------------------------------------- ADMINISTRATOR The United States Trust Company of New York 73 Tremont Street Boston, Massachusetts 02108 -------------------------------------------------------- CUSTODIANS Morgan Stanley Trust Company One Pierrepont Plaza Brooklyn, New York 11201 The United States Trust Company of New York 770 Broadway New York, New York 10003 -------------------------------------------------------- SHAREHOLDER SERVICING AGENT The First National Bank of Boston Investor Relations Department P.O. Box 644, Mail Stop 46-02-09 Boston, Massachusetts 02102-0644 (617) 575-2900 -------------------------------------------------------- LEGAL COUNSEL Rogers & Wells 200 Park Avenue New York, New York 10166 -------------------------------------------------------- INDEPENDENT ACCOUNTANTS Price Waterhouse LLP 1177 Avenue of the Americas New York, New York 10036 -------------------------------------------------------- [LOGO] MORGAN STANLEY EMERGING MARKETS DEBT FUND, INC. [LOGO] FIRST QUARTER REPORT MARCH 31, 1995 MORGAN STANLEY ASSET MANAGEMENT INC. INVESTMENT ADVISER LETTER TO SHAREHOLDERS - - ------- The Mexican peso devaluation of December 20, 1994 set the tone for emerging debt and equity markets in the new year. The first quarter saw violent swings in Brady bond prices in the developing countries. For the three-month period ended March 31, 1995, the Fund had a total return based on net asset value per share of -15.24% versus a return of -11.08% for the benchmark JP Morgan Emerging Markets Bond Index (Index). The Mexican financial crisis was brought about by a combination of economic, financial and political factors. An excessive reliance on short-term debt linked to the US dollar, current account deficits, an overvalued exchange rate, a loose monetary policy, political and social tensions and a mismanaged devaluation produced the financial crisis in Mexico, leading to withdrawals by foreign investors and a run on the country's foreign exchange reserves. A lack of refinancing alternatives in a hostile external environment drove fixed income and equity prices down as Mexico sought funds from its partners in NAFTA and the multilateral agencies in order to avoid rescheduling its liabilities. Domestic political dynamics determined the price behavior of assets for much of the quarter. President Clinton's bold move to bypass Congress by tapping into the Exchange Stabilization Fund to provide Mexico with a potential US$ 20 billion in credits and/or guarantees was a turning point in the market's evaluation of potential default risk. The market remained skeptical as the Mexican government did not announce specific details about their revised economic targets and measures to stabilize their economy in a post-devaluation environment. It was not until March 9 that a comprehensive new economic program was unveiled. March 9 also saw the low in the Index. A high level of systemic risk in the market produced high volatility and correlations across all emerging markets countries. The sell-off, at times indiscriminate, created high correlations, thereby reducing the benefits of diversification in fund portfolios. Reactions to political and economic news and events during periods of falling liquidity caused price volatilities to remain at the high end of their ranges. Constant re-valuation of default risk exacerbated by poor technical conditions (such as the need of broker/dealers to hedge illiquid Eurobond and local currency debt with liquid Brady bonds and the unwinding of structured notes, as prices hit stop-loss levels) caused asset prices to decline precipitously. We underestimated the herd instinct of non-dedicated emerging markets funds to lighten up their positions in emerging markets. MEXICO Fears of an unraveling of the economy and the financial system caused an exodus of funds from Mexican assets. Local markets assets, Eurobonds and Brady bonds were all hit. Some Mexican corporate valuations approached liquidation levels. Price declines in the Brady bonds were about 30%. As the Mexican authorities struggled to put together a comprehensive economic plan, the peso became the barometer of sentiment. After the peso had devalued by about 70% in nominal terms within a few weeks, we felt it was appropriate to add positions in several types of Mexican assets: Brady bonds, sovereign Eurobonds, Tesobonos at yields of 25-30% and short-term peso denominated paper (Cetes). These additions brought our Mexican holdings at quarter-end to 18% of total investments. BRAZIL Brazil, the best performing country in 1994, has disappointed greatly in 1995. Market expectations of rapid constitutional reform facilitating deregulation of the economy, fiscal reform and faster privatization were dashed as the reform process got bogged down in political gamesmanship and a perceived lack of visible leadership in publicly shaping the agenda for reform. The Plan Real succeeded in bringing down inflation, but a lack of progress on fiscal reform left the strong nominal exchange rate to bear too heavy a burden of adjustment. Deterioration in trade performance in the first quarter, on the back of a booming economy, forced the economic team to rethink their strong exchange rate policy and a confused attempt at a controlled devaluation added to the uncertainty in the market. 2 Revaluation of market expectations regarding the pace of reform and a market adjustment to slightly higher inflation and weaker trade performance suggest that asset prices will react positively to any incremental progress in the reform process. Brazil retains the top weighting in our portfolio at 20%. We look for a reversal in Brazil's relative underperformance for the first quarter. ARGENTINA Investors fearing a devaluation and/or sequestration of bank assets took capital out of the banking system and the country on the heels of the Mexican debacle. Although Argentina avoided the price declines in January, the straight jacket of the Convertibility Plan brought about a severe contraction in domestic credit following the capital flight. High interest rates and the drying up of liquidity forced many banks and financial institutions, in an overbanked country, to liquidate portfolios of liquid securities. Some were even suspended from the clearing system and put into receivership. Finance Minister Cavallo attempted to tackle the problem by addressing the growing deficit in the fiscal accounts by cutting expenditures and raising revenues. Price deflation, improvements in the trade accounts, an eventual return of capital into the system, the strengthening of the political position of President Menem in his attempts to further reform the remaining static elements in the Argentine system and a decisive election victory are long-term positives for Argentina. Price recovery from default levels has been swift and Argentina was the best performer in March. We added to our Argentine position during the broad market collapse. At 15% of the total investments of the Fund, Argentina remains one of our top three weightings. We anticipate a re-election of President Menem in May and a continuation of the market-oriented policies under the leadership of Finance Minister Cavallo. VENEZUELA Venezuelan bonds entered the quarter at already high yields. Its perceived insularity from external shocks stemming from a high level of foreign reserves and its cash flows from the oil sector attracted funds seeking refuge from the "tequila effect." The domestic economy continues to suffer from high inflation and low growth as the government has been unable to resolve the problem of excessive liquidity which arose due to the bailout of the banking system. Continued price and foreign exchange controls have limited investment and growth. A lack of progress on the fiscal and monetary fronts could result in further unraveling of the economy. The Venezuelan position has been reduced over the quarter as funds have been added to Mexico. OTHER RUSSIAN Vnesheconombank loans have performed poorly for most of the quarter as the market remains skeptical about Russia's intentions in moving forward on re-negotiating its commercial bank debt. Additionally, President Yeltsin's weakened commitment to reforms and the cost of the Chechnya conflict were negative forces affecting market sentiment. On the positive side, the IMF program to stabilize the ruble and the domestic economy should introduce an element of discipline into domestic economic policy formation and performance. Progress in negotiations with official creditors and commercial banks should provide support to prices in the next quarter. MOROCCO Tranche A loans lost about 13% over the quarter. 1994 will prove to be a hard act to follow in terms of economic performance. A drought in 1995 could result in lower growth, higher inflation and worsened foreign trade performance. However, continued progress in privatization and a relatively modest external debt burden should permit the country to fund emergency food imports to alleviate the supply shock. We had 9% of the total investments of the Fund in Morocco at quarter-end and look to gradually reduce the position on the asset's strength. ECUADOR is the latest entrant into the Brady club, having issued Brady bonds on February 28, 1995. Competent handling of the exchange rate and monetary policy at the time of the border conflict 3 with Peru improved the market's perception of economic policy-making in the country. Decisive actions to restore fiscal equilibrium aided by buoyant oil prices and potential privatization revenues should attract investment in their bonds. We expect PANAMA to be the next Brady country, and anticipate bonds to be issued before the end of 1995. We continue to hold 5% in Panamanian non-performing loans. MARKET OUTLOOK The first quarter crash has sobered both policy-makers and investors in emerging markets. The central lesson learned from December 20, 1994 was that the market will exact a severe penalty upon countries which stray from prudent, balanced macroeconomic policies. We are impressed with the steps taken by other countries, most notably Argentina, in immediate response to the Mexican crisis. We believe the long-term fundamentals of emerging markets are intact, the past three months have instilled discipline and valuations are most compelling. Sincerely, [SIG] Barton M. Biggs CHAIRMAN [SIG] Paul Ghaffari PORTFOLIO MANAGER April 20, 1995 4 INVESTMENTS (UNAUDITED) (Showing Percentage of Total Value of Investments) - - ---------- MARCH 31, 1995
FACE AMOUNT VALUE (000) (000) - - --------------------------------------------------------- - - ------------ DEBT INSTRUMENTS (87.7%) - - -------------------------------------------------------------- - - ------------- ALGERIA (2.4%) LOAN AGREEMENTS +++ Algeria Loan Agreement 1989 7.625%, 12/31/96 FRF 27,830 U.S.$ 1,383 +++ Algeria Reprofiled Loan Agreement 'A' 1992 8.3125%, 12/31/00 U.S.$ 10,220 2,810 ------------- 4,193 ------------- - - -------------------------------------------------------------- - - ------------- ARGENTINA (15.4%) BONDS Compania Austral de Inversiones (Convertible) 7.00%, 3/7/96 U.S.$ 1,000 1,249 +++ Republic of Argentina 'L' 7.3125%, 3/31/05 35,450 19,232 Republic of Argentina Local Markets Trust 13.375%, 8/15/01 8,760 6,110 ------------- 26,591 ------------- - - -------------------------------------------------------------- - - ------------- BRAZIL (20.1%) BONDS +++ Federative Republic of Brazil 'C' Bond 8.00%, 4/15/14 PIK U.S.$17,978 6,696 +++ Federative Republic of Brazil 'C' Bond "Euro" 8.00%, 4/15/14 PIK 39,984 14,894 +++ Federative Republic of Brazil New Money Bond 6.75%, 4/15/09 17,750 8,032 +++ Federative Republic of Brazil Par Bond 'Y3' 6.6875%, 4/15/24 14,250 5,166 ------------- 34,788 ------------- - - -------------------------------------------------------------- - - ------------- BULGARIA (3.5%) BONDS +++ The Republic of Bulgaria Discount Bond 'A' 7.5625%, 7/28/24 U.S.$ 3,549 1,517 +++ The Republic of Bulgaria Discount Bond 'A' "Euro" 7.5625%, 7/28/24 2,000 855 +++ The Republic of Bulgaria Discount Bond 'B' 8.0625%, 7/28/24 880 376 +++ The Republic of Bulgaria Interest Arrears Bond 7.5625%, 7/28/11 3,024 1,036 +++ The Republic of Bulgaria Interest Arrears Bond "Euro" 7.5625%, 7/28/11 6,648 2,277 ------------- 6,061 -------------
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FACE AMOUNT VALUE (000) (000) - - -------------------------------------------------------------- - - ------------- ECUADOR (3.4%) BONDS +++ Republic of Ecuador Discount Bond 7.25%, 2/28/25 U.S.$ 7,792 U.S.$ 3,526 +++ Republic of Ecuador Eligible Interest Bond 7.6875%, 12/21/04 706 349 +++ Republic of Ecuador Par Bond 3.00%, 2/28/25 65 18 +++ Republic of Ecuador Past Due Interest Bond 7.25%, 2/27/15 9,041 2,079 ------------- 5,972 ------------- - - -------------------------------------------------------------- - - ------------- INDIA (1.7%) BOND Saurashtra Cement Co. 17.00%, 11/27/98 INR 940 2,992 ------------- - - -------------------------------------------------------------- - - ------------- INDONESIA (0.9%) BOND Polysindo Eka Perkasa 13.00%, 6/15/01 U.S.$ 1,600 1,472 ------------- - - -------------------------------------------------------------- - - ------------- MEXICO (5.8%) BOND Petroleos Mexicanos 8.625%, 12/1/23 U.S.$ 14,700 7,276 ------------- LOAN AGREEMENTS +++ United Mexican States Multi- Year Refinancing Agreement 7.125%, 12/31/06 1,991 1,080 +++ United Mexican States Old New Money Loans 7.4125% - 7.625%, 3/20/05 3,207 1,740 ------------- 2,820 ------------- 10,096 ------------- - - -------------------------------------------------------------- - - ------------- MOROCCO (8.8%) LOAN AGREEMENTS +++ Kingdom of Morocco Restructuring and Consolidation Agreement `A' 1990 8.5175%, 12/31/00 (Participation: Salomon Brothers) JPY 792,741 4,473 +++ Kingdom of Morocco Restructuring and Consolidation Agreement 'A' 1990 7.375%, 1/1/09 (Participation: Goldman Sachs, JP Morgan, Salomon Brothers) U.S.$ 18,500 10,822 ------------- 15,295 -------------
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FACE AMOUNT VALUE (000) (000) - - -------------------------------------------------------------- - - ------------- NIGERIA (3.5%) BOND Central Bank of Nigeria Par Bond 6.25%, 11/15/20 (including 13,750 warrants) U.S.$ 8,000 U.S.$ 3,060 ------------- LOAN AGREEMENT Central Bank of Nigeria Promissory Note 8.00% annuity, 1/5/10 11,000 2,970 ------------- 6,030 ------------- - - -------------------------------------------------------------- - - ------------- PANAMA (4.8%) LOAN AGREEMENTS Republic of Panama Refinanced Loan Agreement, 9/30/97 U.S.$ 1,000 395 Republic of Panama Unrestructured Loans 19,900 7,861 ------------- 8,256 ------------- - - -------------------------------------------------------------- - - ------------- PERU (0.6%) LOAN AGREEMENT Republic of Peru - Petroperu Working Capital Loan U.S.$ 2,000 980 ------------- - - -------------------------------------------------------------- - - ------------- POLAND (2.4%) BOND +++ The Polish People's Republic Past Due Interest Bond 3.25%, 10/27/14 U.S.$ 10,325 4,156 ------------- - - -------------------------------------------------------------- - - ------------- RUSSIA (4.7%) LOAN AGREEMENTS Bank for Foreign Economic Affairs U.S.$ 35,000 7,962 Bank for Foreign Economic Affairs 'C' DEM 1,000 165 ------------- 8,127 ------------- - - -------------------------------------------------------------- - - ------------- VENEZUELA (9.7%) BONDS +++ Republic of Venezuela Debt Conversion Bond 'DL' 7.6875%, 12/18/07 U.S.$ 16,500 6,971 +++ Republic of Venezuela Front- Loaded Interest Reduction Bond `A' 8.875%, 3/31/07 15,500 6,587 +++ Republic of Venezuela Front- Loaded Interest Reduction Bond `B' 8.875%, 3/31/07 7,500 3,188 ------------- 16,746 ------------- - - -------------------------------------------------------------- - - ------------- TOTAL DEBT INSTRUMENTS (Cost U.S.$183,255) 151,755 -------------
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FACE AMOUNT VALUE (000) (000) - - -------------------------------------------------------------- - - ------------- SHORT TERM INVESTMENTS (12.2%) - - -------------------------------------------------------------- - - ------------- MEXICO (11.8%) MEXICAN CETES 5/18/95 MXN 12,670 U.S.$ 1,689 6/1/95 11,944 1,550 7/6/95 5,872 714 8/3/95 6,130 710 8/17/95 19,677 2,218 8/24/95 21,750 2,432 8/31/95 3,675 406 2/22/96 12,093 1,040 ------------- 10,759 ------------- MEXICAN TESOBONOS 7/27/95 U.S.$ 1,100 993 9/7/95 10,000 8,721 ------------- 9,714 ------------- 20,473 ------------- - - -------------------------------------------------------------- - - ------------- UNITED STATES (0.4%) REPURCHASE AGREEMENT U.S. Trust, 6.00%, dated 3/31/95, due 4/3/95, to be repurchased at U.S. $750, collateralized by U.S. $710 Government National Mortgage Association 9.50% to 10.00%, due 12/15/09 to 1/15/10, valued at U.S. $764 U.S.$ 750 750 ------------- - - -------------------------------------------------------------- - - ------------- TOTAL SHORT TERM INVESTMENTS (Cost U.S.$24,132) 21,223 ------------- - - -------------------------------------------------------------- - - ------------- FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (0.1%) French Franc FRF 353 73 Indian Rupee INR 2,417 77 Japanese Yen JPY 61 1 ------------- (Cost U.S.$145) 151 ------------- - - -------------------------------------------------------------- - - ------------- TOTAL INVESTMENTS (100.0%) (Cost U.S.$207,532) 173,129 ------------- - - -------------------------------------------------------------- - - ------------- OTHER ASSETS AND LIABILITIES Other Assets U.S.$ 17,627 Liabilities (30,150) (12,523) ------------ ------------- - - -------------------------------------------------------------- - - ------------- NET ASSETS Applicable to 16,055,620 issued and outstanding U.S.$.01 par value shares (100,000,000 shares authorized) U.S.$ 160,606 ------------- - - -------------------------------------------------------------- - - ------------- NET ASSET VALUE PER SHARE U.S.$ 10.00 ------------- - - -------------------------------------------------------------- - - ------------- +++ Variable/floating rate or step coupon security - rate disclosed is as of March 31, 1995 PIK--Payment-in-Kind DEM--German Deutsche Mark MXN--Mexican New Peso
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