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: 811-22011
Morgan Stanley Emerging
Markets Domestic Debt Fund, Inc.
(Exact name of registrant as specified in charter)
| 522 Fifth Avenue, New York, New York |
10036 |
| (Address of principal executive offices) |
(Zip code) |
John H. Gernon
522 Fifth Avenue, New York, New York 10036
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-296-0289
Date of fiscal year end: October 31,
Date of reporting period: April 30, 2023
Item 1 - Report to Shareholders
Morgan Stanley Investment Management Inc.
Adviser
Morgan Stanley Emerging Markets
Domestic Debt Fund, Inc.
NYSE: EDD
Semi-Annual Report
April 30, 2023
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Letter to Stockholders
Performance
For the six months ended April 30, 2023, the Morgan Stanley Emerging Markets Domestic Debt Fund, Inc. (the “Fund”) had total returns of 16.95%, based on net asset value, and 17.81% based on market value per share (including reinvestment of distributions),
compared to its benchmark, the J.P. Morgan Government Bond Index – Emerging Markets Global Diversified Index (the “Index”), which returned 16.06%. On April 30, 2023, the closing price of the Fund’s shares on the New York Stock Exchange was $4.61, representing a 15.57% discount to the Fund’s net asset value per share. Past performance is no guarantee of future results.
Please keep in mind that double-digit returns are highly unusual and may not be sustained. Investors should also be aware
that these returns were primarily achieved during favorable market conditions.
Factors Affecting Performance
•Emerging market (EM) domestic debt assets posted positive returns over the six-month period ended April 30, 2023 (as measured by the Index), as EM currencies strengthened versus the U.S. dollar overall and local interest rates fell. Almost
all of the countries in the Index had positive performance during the period, with the exception of Egypt and Turkey.
•Broadly, for the Fund, yield curve and duration (a measure of interest-rate sensitivity) positioning positively contributed
to performance, while currency positioning detracted.
•Overweight positioning to Dominican, Uruguayan and Uzbekistani local bonds contributed to performance. Conversely, an underweight to China and overweight positions to Brazil and Czech Republic detracted.
•During the period, the portfolio management team added exposure to Malaysia, Indonesia and Thailand, while we reduced Singapore, Brazil and Uruguay.
•The use of derivatives both contributed to and detracted from performance during the period. The primary instruments used
were bond futures (U.S. Treasury and German government bond), currency forwards, and interest rate swaps. Bond futures and interest rate swaps were used to gain or hedge interest rate exposure, and currency forwards were used to hedge or add
to currency exposure.
Management Strategies
•The volatility stemming from banking stresses in developed markets put a damper on the macroeconomic picture to some degree. That said, we remain constructive on the EM domestic debt asset class. The U.S. Federal Reserve is near the end of
its monetary tightening cycle, which may relieve pressures created by a strong dollar and also may put select emerging markets
central banks in a position to ease their own policy. The latest growth expectations from the International Monetary Fund
show wide growth differentials between developed and emerging markets, with emerging economies considerably outpacing
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Letter to Stockholders (cont'd)
developed markets. Growth, inflation and policy are quite differentiated among countries and credits within the emerging markets universe, so bottom-up analysis is critical to uncover value.
Sincerely,
John H. Gernon
President and Principal Executive OfficerMay 2023
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Performance Summary (unaudited)
Average Annual Total Returns as of April 30, 2023(1)
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J.P. Morgan Government Bond Index —
Emerging Markets Global Diversified
Index(2)
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Performance data quoted on the table represents past performance, which is no guarantee of future results, and current performance
may be lower or higher than the figures shown. Performance assumes that all dividends and distributions, if any, were reinvested
at prices obtained under the Fund’s dividend reinvestment plan. For the most recent month-end performance figures, please visit www.morganstanley.com/im/closedendfundsshareholderreports. Investment returns and principal value will fluctuate so that Fund
shares, when sold, may be worth more or less than their original cost. The table do not reflect the deduction of taxes that a shareholder
would pay on fund distributions or the sale of fund shares. Total return, market price, NAV, market price distribution rate, and NAV
distribution rate will fluctuate with changes in market conditions. The Fund’s total returns are based upon the market value and net asset value on the last business day of the period.
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Total Distributions per share for the period
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Current Distribution Rate at NAV(3)
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Current Distribution Rate at Market Price(3)
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% Premium/(Discount) to NAV(4)
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All Fund returns are net of fees and expenses and include applicable fee waivers and/or expense limitations. Absent any applicable
fee
waivers and/or expense limitations, performance would have been lower and there can be no assurance that any such waivers
or
limitations will continue in the future.
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The J.P. Morgan Government Bond Index — Emerging Markets Global Diversified Index tracks local currency government bonds issued
by emerging markets. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower
performance. It is not possible to invest directly in an index.
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The Distribution Rate is based on the Fund’s last regular distribution per share in the period (annualized) divided by the Fund’s NAV or
market price at the end of the period. The Fund’s distributions may be comprised of amounts characterized for federal income tax
purposes as qualified and non-qualified ordinary dividends, capital gains and non-dividend distributions, also known as return
of capital.
The Fund will determine the federal income tax character of distributions paid to a shareholder after the end of the calendar
year. The
Fund’s distributions are determined by the investment adviser based on its current assessment of the Fund’s long-term return potential.
Fund distributions may be affected by numerous factors including changes in Fund performance, the cost of financing for leverage,
portfolio holdings, realized and projected returns, and other factors. As portfolio and market conditions change, the rate
of
distributions paid by the Fund could change.
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The shares of the Fund often trade at a discount or premium to their net asset value. The discount or premium may vary over
time and
may be higher or lower than what is quoted in this report.
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Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Portfolio of Investments
(Showing Percentage of Total Value of Investments)
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Fixed Income Securities (97.5%)
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Republic of Armenia International
Bond,
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Republic of Armenia Treasury Bonds,
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Benin Government International Bond,
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Bolivian Government International
Bond,
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Brazil Notas do Tesouro Nacional,
Series F
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Colombia Government International
Bond,
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Financiera de Desarrollo Territorial SA
Findeter,
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Czech Republic Government Bond,
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Dominican Republic (6.7%)
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Dominican Republic Central Bank
Notes,
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Dominican Republic International
Bond,
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8.00%, 1/15/27 - 3/12/27 (a)
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12.00%, 8/8/25 - 10/3/25 (a)
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El Salvador Government International
Bond,
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Honduras Government International
Bond,
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3.00%, 10/27/27 - 4/25/41
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6
The accompanying notes are an integral part of the financial statements.
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Portfolio of Investments (cont'd)
(Showing Percentage of Total Value of Investments)
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Ivory Coast Government International
Bond,
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Jordan Government International
Bond,
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North Macedonia Government
International Bond,
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Malaysia Government Bond,
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8.50%, 5/31/29 - 11/18/38
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Republic of Poland Government Bond,
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4.75%, 2/24/25 - 10/11/34
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The accompanying notes are an integral part of the financial statements.
7
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Portfolio of Investments (cont'd)
(Showing Percentage of Total Value of Investments)
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Romanian Government International
Bond,
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Republic of South Africa Government
Bond,
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International Finance Corp.,
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Suriname Government International
Bond,
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Thailand Government Bond,
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1.60%, 12/17/29 - 6/17/35
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Uruguay Government International
Bond,
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Uruguay Monetary Regulation Bill,
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Republic of Uzbekistan International
Bond,
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Total Fixed Income Securities (Cost $403,302)
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Short-Term Investments (2.5%)
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U.S. Treasury Security (1.1%)
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U.S. Treasury Bill, 5.01%, 11/30/23
(Cost $4,292) (b)
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8
The accompanying notes are an integral part of the financial statements.
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Portfolio of Investments (cont'd)
(Showing Percentage of Total Value of Investments)
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Investment Company (1.4%)
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Morgan Stanley Institutional Liquidity
Funds - Treasury Securities
Portfolio - Institutional Class
(See Note F) (Cost $5,400)
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Total Short-Term Investments (Cost $9,692)
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TOTAL INVESTMENTS EXCLUDING PURCHASED
OPTIONS (109.8%)(COST $412,994)
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TOTAL PURCHASED OPTIONS OUTSTANDING
(0.0%) ‡ (COST $225)
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TOTAL INVESTMENTS (100%) (Cost $413,219)(c)(d)
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LIABILITIES IN EXCESS OF OTHER ASSETS
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Country assignments and aggregations are based generally on third party vendor classifications and information, and may be different from the assignments and aggregations under the policies set forth in the Fund’s prospectus and/or statement of additional information relating to geographic classifications.
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Amount is less than 0.05%.
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144A security — Certain conditions for public sale may
exist. Unless otherwise noted, these securities are
deemed to be liquid.
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Rate shown is the yield to maturity at April 30, 2023.
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Securities are available for collateral in connection with
open foreign currency forward exchange contracts,
futures contracts and swap agreements.
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At April 30, 2023, the aggregate cost for federal income
tax purposes is $413,219,000. The aggregate gross
unrealized appreciation is $16,807,000 and the
aggregate gross unrealized depreciation is $36,897,000,
resulting in net unrealized depreciation of $20,090,000.
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The accompanying notes are an integral part of the financial statements.
9
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Portfolio of Investments (cont'd)
Foreign Currency Forward Exchange Contracts:
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The Fund had the following foreign currency forward exchange contracts open at April 30, 2023:
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Contracts
to Deliver
(000)
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Unrealized
Appreciation
(Depreciation)
(000)
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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10
The accompanying notes are an integral part of the financial statements.
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Portfolio of Investments (cont'd)
Foreign Currency Forward Exchange Contracts: (cont'd)
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Contracts
to Deliver
(000)
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Unrealized
Appreciation
(Depreciation)
(000)
|
Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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Goldman Sachs International
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State Street Bank and Trust Co.
|
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|
State Street Bank and Trust Co.
|
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|
|
The accompanying notes are an integral part of the financial statements.
11
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Portfolio of Investments (cont'd)
Foreign Currency Forward Exchange Contracts: (cont'd)
|
|
|
|
|
Contracts
to Deliver
(000)
|
|
|
Unrealized
Appreciation
(Depreciation)
(000)
|
State Street Bank and Trust Co.
|
|
|
|
|
|
|
State Street Bank and Trust Co.
|
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|
|
State Street Bank and Trust Co.
|
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|
State Street Bank and Trust Co.
|
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|
State Street Bank and Trust Co.
|
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|
|
State Street Bank and Trust Co.
|
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|
|
State Street Bank and Trust Co.
|
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|
State Street Bank and Trust Co.
|
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|
State Street Bank and Trust Co.
|
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|
|
State Street Bank and Trust Co.
|
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|
State Street Bank and Trust Co.
|
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|
State Street Bank and Trust Co.
|
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|
State Street Bank and Trust Co.
|
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|
State Street Bank and Trust Co.
|
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12
The accompanying notes are an integral part of the financial statements.
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Portfolio of Investments (cont'd)
|
|
The Fund had the following call options purchased open at April 30, 2023:
|
|
|
|
|
|
|
|
|
|
Unrealized
Depreciation
(000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Fund had the following call options written open at April 30, 2023:
|
|
|
|
|
|
|
|
|
|
Unrealized
Appreciation
(000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Fund had the following futures contracts open at April 30, 2023:
|
|
|
|
|
|
|
Unrealized
Depreciation
(000)
|
|
|
|
|
|
|
|
|
U.S. Treasury 10 yr. Note (United States)
|
|
|
|
|
|
|
U.S. Treasury 10 yr. Ultra Note
(United States)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Agreements:
|
The Fund had the Following Interest Rate Swap Agreements open at April 30, 2023:
|
|
|
|
Pay/
Receive
Floating
Rate
|
|
Payment
Frequency
Paid/
Received
|
|
|
|
Upfront
Payment
Paid
(Received)
(000)
|
Unrealized
Appreciation
(Depreciation)
(000)
|
Morgan Stanley & Co. LLC*
|
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
US CPI All Urban
Consumers Index
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
US CPI All Urban
Consumers Index
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
US CPI All Urban
Consumers Index
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
US CPI All Urban
Consumers Index
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.
13
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Portfolio of Investments (cont'd)
Interest Rate Swap Agreements: (cont'd)
|
|
|
|
|
|
Pay/
Receive
Floating
Rate
|
|
Payment
Frequency
Paid/
Received
|
|
|
|
Upfront
Payment
Paid
(Received)
(000)
|
Unrealized
Appreciation
(Depreciation)
(000)
|
Morgan Stanley & Co. LLC*
|
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
US CPI All Urban
Consumers Index
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. LLC*
|
US CPI All Urban
Consumers Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chinese Yuan Renminbi Offshore
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
Total Investments
|
|
|
|
|
|
|
|
|
|
|
|
Industries and/or investment types representing less than 5% of total
investments.
|
|
|
Does not include open short futures contracts with a value of
approximately $7,361,000 and total unrealized depreciation of
approximately $260,000. Does not include open foreign currency forward
exchange contracts with net unrealized depreciation of approximately
$627,000. Also does not include open swap agreements with net
unrealized depreciation of approximately $143,000.
|
14
The accompanying notes are an integral part of the financial statements.
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Financial Statements
Statement of Assets and Liabilities
|
|
|
|
|
Investments in Securities of Unaffiliated Issuers, at Value (Cost $407,819)
|
|
Investment in Security of Affiliated Issuer, at Value (Cost $5,400)
|
|
Total Investments in Securities, at Value (Cost $413,219)
|
|
Foreign Currency, at Value (Cost $12,611)
|
|
|
|
|
Unrealized Appreciation on Foreign Currency Forward Exchange Contracts
|
|
Receivable for Investments Sold
|
|
|
|
|
Receivable for Variation Margin on Futures Contracts
|
|
|
|
|
Receivable from Affiliate
|
|
|
|
|
|
|
|
|
|
|
Payable for Line of Credit
|
|
Unrealized Depreciation on Foreign Currency Forward Exchange Contracts
|
|
|
|
|
Payable for Investments Purchased
|
|
|
|
|
Deferred Capital Gain Country Tax
|
|
Payable for Advisory Fees
|
|
Payable for Variation Margin on Swap Agreements
|
|
Payable for Custodian Fees
|
|
Payable for Professional Fees
|
|
Options Written, at Value
|
|
Payable for Administration Fees
|
|
Payable for Stockholder Servicing Agent Fees
|
|
|
|
|
|
|
|
|
|
|
Applicable to 65,745,882 Issued and Outstanding $0.01 Par Value Shares (100,000,000 Shares Authorized)
|
|
Net Asset Value Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.
15
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Financial Statements (cont'd)
|
|
Six Months Ended
April 30, 2023
(000)
|
|
|
|
Interest from Securities of Unaffiliated Issuer (Net of $148 of Foreign Taxes Withheld)
|
|
Dividends from Security of Affiliated Issuer (Note F)
|
|
|
|
|
|
|
|
|
|
|
Interest Expense on Line of Credit (Note G)
|
|
Administration Fees (Note C)
|
|
|
|
|
Line of Credit Commitment Fees (Note G)
|
|
|
|
|
Stockholder Reporting Expenses
|
|
Stockholder Servicing Agent Fees
|
|
Directors' Fees and Expenses
|
|
|
|
|
|
|
|
Rebate from Morgan Stanley Affiliate (Note F)
|
|
|
|
|
|
|
|
|
|
|
Investments Sold (Net of $327 of Capital Gain Country Tax)
|
|
Foreign Currency Forward Exchange Contracts
|
|
Foreign Currency Translation
|
|
|
|
|
|
|
|
|
|
|
Change in Unrealized Appreciation (Depreciation):
|
|
Investments (Net of Increase in Deferred Capital Gain Country Tax of $167)
|
|
Foreign Currency Forward Exchange Contracts
|
|
Foreign Currency Translation
|
|
|
|
|
|
|
|
|
|
|
Net Change in Unrealized Appreciation (Depreciation)
|
|
Net Realized Gain and Change in Unrealized Appreciation (Depreciation)
|
|
Net Increase in Net Assets Resulting from Operations
|
|
16
The accompanying notes are an integral part of the financial statements.
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023
Financial Statements (cont'd)
|
|
|
Statements of Changes in Net Assets
|
Six Months Ended
April 30, 2023
(unaudited)
(000)
|
Year Ended
October 31, 2022
(000)
|
Increase (Decrease) in Net Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Unrealized Appreciation (Depreciation)
|
|
|
Net Increase (Decrease) in Net Assets Resulting from Operations
|
|
|
Dividends and Distributions to Stockholders
|
|
|
|
|
|
|
Capital Share Transactions:
|
|
|
Repurchase of Shares (241,675 and 104,568 shares)
|
|
|
Net Decrease in Net Assets Resulting from Capital Share Transactions
|
|
|
Total Increase (Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.
17
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Financial Statements (cont'd)
|
|
Six Months Ended
April 30, 2023
(000)
|
Cash Flows From Operating Activities
|
|
Net Increase in Net Assets Resulting from Operations
|
|
Adjustments to Reconcile Net Increase (Decrease) in Net Assets from Operations to
Net Cash Provided by (Used for) Operating Activities:
|
|
Proceeds from (Payments on) Sales and Maturities of Long-Term Investments
|
|
Proceeds from (Payments on) Foreign Currency Forward Exchange Contracts, Foreign Currency Transactions,
Futures Contracts and Swap Agreements
|
|
Proceeds from (Payments on) Purchases of Long-Term Investments
|
|
Net (Increase) Decrease in Short-Term Investments
|
|
Net (Increase) Decrease in Receivable for Variation Margin on Futures Contracts and Swap Agreements
|
|
Net (Increase) Decrease in Interest Receivable
|
|
Net (Increase) Decrease in Receivables Related to Operations
|
|
Net Increase (Decrease) in Advisory Fees Payable
|
|
Net Increase (Decrease) in Interest Payable
|
|
Net Increase (Decrease) in Payables Related to Operations
|
|
Net Realized (Gain) Loss for Investments Sold, Foreign Currency Forward Exchange Contracts, Foreign Currency
Translation, Futures Contracts and Swap Agreements
|
|
Net Change in Unrealized Appreciation (Depreciation) for Investments, Foreign Currency Forward Exchange
Contracts, Foreign Currency Translation, Futures Contracts, Options Written and Swap Agreements
|
|
Accretion/Amortization of Discounts and Premiums
|
|
Net Cash Provided by (Used for) Operating Activities
|
|
Cash Flows From Financing Activities:
|
|
Cash Payments for Line of Credit
|
|
Cash Paid for Repurchase of Shares
|
|
|
|
|
Net Cash Provided by (Used for) Financing Activities
|
|
Net Increase (Decrease) in Cash
|
|
Cash and Foreign Currency at Beginning of Period*
|
|
Cash and Foreign Currency at End of Period*
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
Interest Paid on Line of Credit during the Period
|
|
|
|
Includes cash of approximately $319,000 and $0, foreign currency of approximately $1,411,000 and $12,618,000 and bank overdraft
of $0 and $737,000 as of October 31, 2022 and April 30, 2023, respectively.
|
18
The accompanying notes are an integral part of the financial statements.
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Financial Highlights
Selected Per Share Data and Ratios
|
|
Six Months Ended
April 30, 2023
(Unaudited)
|
|
|
|
|
|
|
|
|
Net Asset Value, Beginning of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized and Unrealized Gain (Loss)
|
|
|
|
|
|
|
Total from Investment Operations
|
|
|
|
|
|
|
Distributions from and/or in Excess of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-Dilutive Effect of Share Repurchase
Program
|
|
|
|
|
|
|
Net Asset Value, End of Period
|
|
|
|
|
|
|
Per Share Market Value, End of Period
|
|
|
|
|
|
|
TOTAL INVESTMENT RETURN:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA:
|
|
|
|
|
|
|
Net Assets, End of Period (Thousands)
|
|
|
|
|
|
|
Ratio of Expenses to Average Net Assets
|
|
|
|
|
|
|
Ratio of Expenses to Average Net Assets
Excluding Interest Expense
|
|
|
|
|
|
|
Ratio of Net Investment Income to Average
Net Assets
|
|
|
|
|
|
|
Ratio of Rebate from Morgan Stanley Affiliate
to Average Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share amount is based on average shares outstanding.
|
|
|
Amount is less than $0.005 per share.
|
|
|
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. Total returns are based upon the market value and net asset value on the last
business
day of each period.
|
|
|
|
|
|
|
|
|
The Ratio of Expenses and Ratio of Net Investment Income reflect the rebate of certain Fund expenses in connection with the
investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as “Ratio
of Rebate from Morgan Stanley Affiliates to Average Net Assets.”
|
|
|
Amount is less than 0.005%.
|
The accompanying notes are an integral part of the financial statements.
19
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Notes to Financial Statements
The Morgan Stanley Emerging Markets Domestic Debt Fund, Inc. (the “Fund”) was incorporated in Maryland on January 25, 2007 and is registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “Act”). The Fund applies investment company accounting and reporting guidance Accounting Standards Codification (“ASC”) Topic 946. The Fund’s primary investment objective is to seek a high level of current income, with a secondary investment objective of long-term capital appreciation.
A.Significant Accounting Policies: The following significant accounting policies are in conformity with U.S. generally accepted accounting principles (“GAAP”). Such policies are consistently followed by the Fund in the preparation of its financial statements. GAAP 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: (1) Fixed income securities may be valued by an outside pricing service/vendor approved by the Fund's Board of Directors ("the Directors"). The pricing service/vendor may employ a pricing model that takes into account, among other things, bids, yield spreads and/or other market data and specific security characteristics. If Morgan stanley Investment Management Inc. (the "Adviser") or Morgan Stanley Investment Management Limited ("MSIM Limited")(the "Sub-Adviser"), each a wholly-owned subsidiary of Morgan stanley, determines that the price provided by the outside pricing service/vendor does not reflect the security’s fair value or is unable to provide a price, prices from brokers/dealers may also be utilized. In these circumstances, the value of the security will be the mean of bid and asked prices obtained from brokers/dealers; (2) when market quotations are not readily available, as defined by Rule 2a-5 under the Act, including circumstances under which the Adviser or the Sub-
Adviser determines that the closing price, last sale price or the mean between the last reported bid and asked prices are not reflective of a security’s market value, portfolio securities are valued at their fair value as determined in good faith under procedures approved by and under the general supervision of the Directors. Occasionally, developments affecting 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 of the New York Stock Exchange (“NYSE”). If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Directors, Adviser or the Sub-Adviser by using a pricing service and/or procedures approved by the Directors; (3) listed options are valued at the last reported sales price on the exchange on which they are listed (or at the exchange official closing price if such exchange reports an official closing price). If an official closing price or last reported sales price is unavailable, the listed option should be fair valued at the mean between its latest bid and ask prices. Unlisted options are valued at the mean between their latest bid and ask prices from a broker/dealer or valued by a pricing service/vendor; (4) futures are valued at the settlement price on the exchange on which they trade or, if a settlement price is unavailable, at the last sale price on the exchange; (5) over-the-counter (“OTC”) swaps may be valued by an outside pricing service approved by the Directors or quotes from a broker/dealer. Swaps cleared on a clearinghouse or exchange may be valued using the closing price provided by the clearinghouse or exchange; (6) foreign exchange transactions (“spot contracts”) and foreign exchange forward contracts (“forward contracts”) are valued daily using an independent pricing vendor at the spot and forward rates, respectively, as
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Notes to Financial Statements (cont'd)
of the close of the NYSE; and (7) investments in mutual funds, including the Morgan Stanley Institutional Liquidity Funds, are valued at the net asset value (“NAV”) as of the close of each business day.
In connection with Rule 2a-5 of the Act, the Directors have designated the Fund's Adviser as its valuation designee. The valuation designee has responsibility for determining fair value and to make the actual calculations pursuant to the fair valuation methodologies previously approved by the Directors. Under procedures approved by the Directors, the Fund’s Adviser, as valuation designee, has formed a Valuation Committee whose members are approved by the Directors. The Valuation Committee provides administration and oversight of the Fund’s valuation policies and procedures, which are reviewed at least annually by the Directors. These procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers and other market sources to determine fair value.
2.Fair Value Measurement: Financial Accounting Standards Board ("FASB") ASC 820, "Fair Value Measurement" (“ASC 820”), defines fair value as the price that would be received to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-tier hierarchy to distinguish between (1) inputs that reflect the assumptions market participants would use in valuing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in valuing an asset or liability developed based on the best information available in the circumstances (unobservable inputs) and to establish classification of fair value measurements for disclosure purposes. Various inputs are used in determining the value
of the Fund's investments. The inputs are summarized in the three broad levels listed below:
•Level 1 – unadjusted quoted prices in active markets for identical investments
•Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)
•Level 3 – significant unobservable inputs including the Fund’s own assumptions in determining the fair value of investments. 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.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities and the determination of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each security.
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Notes to Financial Statements (cont'd)
The following is a summary of the inputs used to value the Fund’s investments as of April 30, 2023:
|
|
Level 1
Unadjusted
Quoted
Prices
(000)
|
Level 2
Other
Significant
Observable
Inputs
(000)
|
Level 3
Significant
Unobservable
Inputs
(000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed
Income
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Short-Term
Investments
|
|
|
|
|
Foreign Currency
Forward
Exchange
Contracts
|
|
|
|
|
Interest Rate
Swap
Agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Forward
Exchange
Contracts
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
Swap
Agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers between investment levels may occur as the markets fluctuate and/or the availability of data used in an investment’s valuation changes.
3.Foreign Currency Translation and Foreign
Investments: The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars as follows:
—
investments, other assets and liabilities at the prevailing rate 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 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) on investments in securities are included in the reported net realized and unrealized gains (losses) on investment transactions and balances. However, pursuant to U.S. federal income tax regulations, gains and losses from certain foreign currency transactions and the foreign currency portion of gains and losses realized on sales and maturities of foreign denominated debt securities are treated as ordinary income for U.S. federal income tax purposes.
Net realized gains (losses) on foreign currency transactions represent net foreign exchange gains (losses) from foreign currency forward exchange contracts, disposition of foreign
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Notes to Financial Statements (cont'd)
currencies, currency gains (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. The change in unrealized currency gains (losses) on foreign currency transactions 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, which are denominated in foreign currencies. Such securities 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 securities 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 securities of companies based in the U.S. In addition, emerging market issuers may be subject to substantial governmental involvement in the economy and greater social, economic and political uncertainty.
4.Derivatives: The Fund may, but is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. To the extent the Fund invests in derivative instruments that the Adviser believes have economic characteristics similar to such securities, including, but not limited to, emerging market currency derivatives and swap agreements, such investments will be counted for purposes of meeting the Fund's 80% policy. Derivatives are financial instruments whose value is based, in part, on the value of an underlying asset, interest rate, index or financial instrument. Prevailing interest rates and volatility levels, among other things, also affect the value of derivative instruments. A derivative instrument often has risks similar
to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which the derivative instrument relates, risks that the transactions may not be liquid, risks arising from margin and payment requirements, risks arising from mispricing or valuation complexity and operational and legal risks. The use of derivatives involves risks that are different from, and possibly greater than, the risks associated with other portfolio investments. Derivatives may involve the use of highly specialized instruments that require investment techniques and risk analyses different from those associated with other portfolio investments. All of the Fund’s holdings, including derivative instruments, are marked-to-market each day with the change in value reflected in unrealized appreciation (depreciation). Upon disposition, a realized gain or loss is recognized.
Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss. Leverage associated with derivative transactions may cause the Fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or may cause the Fund to be more volatile than if the Fund had not been leveraged. Although the Adviser seeks to use derivatives to further the Fund’s investment objectives, there is no assurance that the use of derivatives will achieve this result.
Following is a description of the derivative instruments and techniques that the Fund used during the period and their associated risks:
Options: With respect to options, the Fund is subject to equity risk, interest rate risk and foreign currency exchange
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Notes to Financial Statements (cont'd)
risk in the normal course of pursuing its investment objectives. If the Fund buys an option, it buys a legal contract giving it the right to buy or sell a specific amount of the underlying instrument or foreign currency, or futures contract on the underlying instrument or foreign currency, at an agreed-upon price during a period of time or on a specified date typically in exchange for a premium paid by the Fund. The Fund may purchase and/or sell put and call options. Purchasing call options tends to increase the Fund’s exposure to the underlying (or similar) instrument. Purchasing put options tends to decrease the Fund’s exposure to the underlying (or similar) instrument. When entering into purchased option contracts, the Fund bears the risk of interest or exchange rates or securities prices moving unexpectedly, in which case, the Fund may not achieve the anticipated benefits of the purchased option contracts; however the risk of loss is limited to the premium paid. Purchased options are reported as part of “Total Investments in Securities” in the Statement of Assets and Liabilities. Premium paid for purchasing options which expired are treated as realized losses. If the Fund sells an option, it sells to another party the right to buy from or sell to the Fund a specific amount of the underlying instrument or foreign currency, or futures contract on the underlying instrument or foreign currency, at an agreed upon price during a period of time or on a specified date typically in exchange for a premium received by the Fund. The Fund may write call and put options on stock indexes, futures, securities or currencies it owns or in which it may invest. Writing put options tend to increase the Fund’s exposure to the underlying instrument. Writing call options tend to decrease the Fund’s exposure to the underlying instruments. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability. Any liability recorded is subsequently adjusted to reflect the current value of the options written. Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are exercised or are closed are added to or offset against the proceeds or amount paid on the transaction to determine the net realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. When options are purchased OTC, the Fund bears the risk that the counterparty that wrote the option will be unable or unwilling to perform its obligations under the option contract. Options may also be illiquid and the Fund may have difficulty closing out its position. A decision as to whether, when and how to use options involves the exercise of skill and judgment and even a well-conceived option transaction may be unsuccessful because of market behavior or unexpected events. The prices of options can be highly volatile and the use of options can lower total returns.
Futures: A futures contract is a standardized, exchange traded agreement to buy or sell a specific quantity of an underlying asset, reference rate or index at a specific price at a specific future time. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying instrument. Depending on the terms of the particular contract, futures contracts are settled through either physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. During the period the futures contract is open, payments are received from or made to the broker based upon changes in the value of the contract (the variation margin). A decision as to whether, when and how to use futures contracts involves the exercise of skill and judgment and even a well-conceived futures transaction may be unsuccessful because of market behavior or unexpected events. In addition to the derivatives risks
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Notes to Financial Statements (cont'd)
discussed above, the prices of futures contracts can be highly volatile, using futures contracts can lower total return and the potential loss from futures contracts can exceed the Fund’s initial investment in such contracts. No assurance can be given that a liquid market will exist for any particular futures contract at any particular time.
Foreign Currency Forward Exchange Contracts: In connection with its investments in foreign securities, the Fund also entered into contracts with banks, brokers/dealers to purchase or sell foreign currencies at a future date. A foreign currency forward exchange contract (“currency contract”) is a negotiated agreement between the contracting parties to exchange a specified amount of currency at a specified future time at a specified rate. The rate can be higher or lower than the spot rate between the currencies that are the subject of the contract. Currency contracts may be used to protect against uncertainty in the level of future foreign currency exchange rates or to gain or modify exposure to a particular currency. To the extent hedged by the use of currency contracts, the precise matching of the currency contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it matures. Furthermore, such transactions may reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken. There is additional risk to the extent that currency contracts create exposure to currencies in which the Fund’s securities are not denominated. Unanticipated changes in currency prices may result in poorer overall performance for the Fund than if it had not entered into such contracts. The use of currency contracts involves the risk of loss from the insolvency or bankruptcy of the counterparty to the
contract or the failure of the counterparty to make payments or otherwise comply with the terms of the contract. A currency 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 (losses) when the currency contract is closed equal to the difference between the value of the currency contract at the time it was opened and the value at the time it was closed.
Swaps: The Fund may enter into OTC swap contracts or cleared swap transactions. A swap contract is an agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, with the payments calculated by reference to specified securities, indices, reference rates, currencies or other instruments. Typically swap agreements provide that when the period payment dates for both parties are the same, the payments are made on a net basis (i.e., the two payment streams are netted out, with only the net amount paid by one party to the other). The Fund’s obligations or rights under a swap contract entered into on a net basis will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each party. Cleared swap transactions may help reduce counterparty credit risk. In a cleared swap, the Fund’s ultimate counterparty is a clearinghouse rather than a swap dealer, bank or other financial institution. OTC swap agreements are not entered into or traded on exchanges and often there is no central clearing or guaranty function for OTC swaps. These OTC swaps are often subject to credit risk or the risk of default or non-performance by the counterparty. Both OTC and cleared swaps could result in losses if interest rates, foreign currency exchange rates or other factors are not correctly anticipated by the Fund or if the reference index, security or investments do not perform as expected. During the period swap agreements are open, payments are received
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Notes to Financial Statements (cont'd)
from or made to the counterparty or clearing-house based on changes in the value of the contract or variation margin, respectively. The Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulatory developments require the clearing and exchange-trading of certain standardized swap transactions. Mandatory exchange-trading and clearing is occurring on a phased-in basis based on the type of market participant and U.S. Commodities Futures Trading Commission (“CFTC”) approval of contracts for central clearing and exchange trading.
The Fund may enter into interest rate swaps which is an agreement between two parties to exchange their respective commitments to pay or receive interest. Interest rate swaps are generally entered into on a net basis. Interest rate swaps do not involve the delivery of securities, other underlying assets, or principal. Accordingly, the risk of market loss with respect to interest rate swaps is typically limited to the net amount of interest payments that the Fund is contractually obligated to make.
When the Fund has an unrealized loss on a swap agreement, the Fund has instructed the custodian to pledge cash or liquid securities as collateral with a value approximately equal to the amount of the unrealized loss. Collateral pledges are monitored and subsequently adjusted if and when the swap valuations fluctuate. If applicable, cash collateral is included with “Due from (to) Broker” in the Statement of Assets and Liabilities.
Upfront payments paid or received by the Fund will be reflected as an asset or liability, respectively, in the Statement of Assets and Liabilities.
FASB ASC 815, “Derivatives and Hedging” (“ASC 815”), is intended to improve financial reporting about derivative instruments by requiring enhanced disclosures to enable investors to better understand how and why the Fund uses
derivative instruments, how these derivative instruments are accounted for and their effects on the Fund’s financial position and results of operations.
The following tables set forth the fair value of the Fund’s derivative contracts by primary risk exposure as of April 30, 2023:
|
|
Asset Derivatives
Statement of
Assets and
Liabilities Location
|
|
|
Foreign Currency
Forward Exchange
Contracts
|
Unrealized Appreciation
on Foreign Currency
Forward Exchange
Contracts
|
|
|
|
|
Variation Margin on
Swap Agreements
|
|
|
|
|
Investments, at
Value
(Purchased Options)
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
Statement of
Assets and
Liabilities Location
|
|
|
Foreign Currency
Forward Exchange
Contracts
|
Unrealized Depreciation
on Foreign Currency
Forward Exchange
Contracts
|
|
|
|
|
Variation Margin on
Futures Contracts
|
|
|
|
|
Variation Margin on
Swap Agreements
|
|
|
|
|
Investments, at
Value (Options
Written)
|
|
|
|
|
|
|
|
|
|
This amount represents the cumulative appreciation (depreciation)
as reported in the Portfolio of Investments. The Statement of
Assets and Liabilities only reflects the current day’s net variation
margin.
|
|
|
Amount is included in Investments in Securities in the Statement of
Assets and Liabilities.
|
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Notes to Financial Statements (cont'd)
The following tables set forth by primary risk exposure the Fund’s realized gains (losses) and change in unrealized appreciation (depreciation) by type of derivative contract for the six months ended April 30, 2023 in accordance with ASC 815:
|
|
|
|
|
|
|
|
Foreign Currency
Forward Exchange
Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Unrealized Appreciation (Depreciation)
|
|
|
|
|
|
|
Foreign Currency
Forward Exchange
Contracts
|
|
|
|
|
|
|
|
|
|
|
|
Investments
(Purchased Options)
|
|
|
|
|
|
|
|
|
|
|
|
Amounts are included in Change in Unrealized Appreciation
(Depreciation) on Investments in the Statement of Operations.
|
At April 30, 2023, the Fund’s derivative assets and liabilities are as follows:
Gross Amounts of Assets and Liabilities Presented
in the Statement of Assets and Liabilities
|
|
|
|
|
Foreign Currency Forward Exchange
Contracts
|
|
|
Gross Amounts of Assets and Liabilities Presented
in the Statement of Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excludes exchange-traded derivatives.
|
|
|
Absent an event of default or early termination, OTC derivative assets and
liabilities are presented gross and not offset in the Statement of Assets
and Liabilities.
|
|
|
Amount is included in Investments in Securities in the Statement of Assets
and Liabilities.
|
The Fund typically enters into International Swaps and Derivatives Association, Inc. Master Agreements (“ISDA Master Agreements”) or similar master agreements (collectively, “Master Agreements”) with its contract counterparties for certain OTC derivatives in order to, among other things, reduce its credit risk to counterparties. ISDA Master Agreements include provisions for general obligations, representations, collateral and events of default or termination. Under an ISDA Master Agreement, the Fund typically may offset with the counterparty certain OTC derivative financial instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment (close-out netting) in the event of default, termination and/or potential deterioration in the credit quality of the counterparty. Various Master Agreements govern the terms of certain transactions with counterparties, including transactions such as swap, forward, repurchase and reverse repurchase agreements. These Master Agreements typically attempt to reduce the counterparty risk associated with such transactions by specifying credit protection mechanisms and providing standardization that improves legal certainty. Cross-termination provisions under Master Agreements typically provide that a default in connection with one transaction between the Fund and a counterparty gives the non-defaulting party the right to terminate any other
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Notes to Financial Statements (cont'd)
transactions in place with the defaulting party to create one single net payment due to/due from the defaulting party and may be a feature in certain Master Agreements. In the event the Fund exercises its right to terminate a Master Agreement after a counterparty experiences a termination event as defined in the Master Agreement, the return of collateral with market value in excess of the Fund’s net liability may be delayed or denied.
The following tables present derivative financial instruments that are subject to enforceable netting arrangements as of April 30, 2023:
Gross Amounts Not Offset in the Statement of Assets and Liabilities
|
|
|
Gross Asset
Derivatives
Presented in the
Statement of
Assets and
Liabilities
(000)
|
Financial
Instrument
(000)
|
Collateral
Received(a)
(000)
|
Net
Amount
(not less
than $0)
(000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goldman Sachs
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Statement of Assets and Liabilities
|
|
|
Gross Liability
Derivatives
Presented in the
Statement of
Assets and
Liabilities
(000)
|
Financial
Instrument
(000)
|
Collateral
Pledged(a)
(000)
|
Net
Amount
(not less
than $0)
(000)
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Statement of Assets and Liabilities
|
|
|
Gross Liability
Derivatives
Presented in the
Statement of
Assets and
Liabilities
(000)
|
Financial
Instrument
(000)
|
Collateral
Pledged(a)
(000)
|
Net
Amount
(not less
than $0)
(000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goldman Sachs
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State Street Bank
and Trust Co.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In some instances, the actual collateral received or pledged may be more
than the amount shown here due to overcollateralization.
|
For the six months ended April 30, 2023, the average monthly amount outstanding for each derivative type is as follows:
Foreign Currency Forward Exchange
Contracts:
|
|
Average monthly principal amount
|
|
|
|
|
Average monthly notional value
|
|
|
|
|
Average monthly notional amount
|
|
|
|
|
Average monthly notional amount
|
|
|
|
|
Average monthly notional amount
|
|
5.Indemnifications: 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
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Notes to Financial Statements (cont'd)
pursuant to these contracts and expects the risk of loss to be remote.
6.Dividends and Distributions to Stockholders: Dividends and distributions to stockholders are recorded on the ex-dividend date. Dividends from net investment income, if any, are declared and paid quarterly. Net realized capital gains, if any, are distributed at least annually.
7.Other: Security transactions are accounted for on the date the securities are purchased or sold. Realized gains (losses) on the sale of investment securities are determined on the specific identified cost basis. Interest income is recognized on the accrual basis except where collection is in doubt and is recorded net of foreign withholding tax. Dividends and distributions are recorded on the ex-dividend date (except for certain foreign dividends which may be recorded as soon as the Fund is informed of such dividends) net of applicable withholding taxes.
B.Advisory/Sub-Advisory Fees: The Adviser, a wholly-owned subsidiary of Morgan Stanley, provides the Fund with advisory services under the terms of an Investment Advisory Agreement, calculated weekly and payable monthly, at an annual rate of 1.00% of the Fund’s average weekly managed assets.
The Adviser has entered into a Sub-Advisory Agreement with the Sub-Adviser, a wholly-owned subsidiary of Morgan Stanley. The Sub-Adviser provides the Fund with advisory services subject to the overall supervision of the Adviser and the Fund's Officers and Directors. The Adviser pays the Sub-Adviser on a monthly basis a portion of the net advisory fees the Adviser receives from the Fund.
C.Administration Fees: The Adviser also serves as Administrator to the Fund and provides administrative services pursuant to an Administration Agreement for an annual fee, accrued daily and paid monthly, of 0.08% of the Fund’s average
weekly managed net assets.
Under a Sub-Administration Agreement between the Administrator and State Street Bank and Trust Company (“State Street”), State Street provides certain administrative services to the Fund. For such services, the Administrator pays State Street a portion of the fee the Administrator receives from the Fund.
D.Custodian Fees: State Street (the “Custodian”) and its affiliate serve as Custodian for the Fund in accordance with a Custodian Agreement. The Custodian holds cash, securities and other assets of the Fund as required by the Act. Custody fees are payable monthly based on assets held in custody, 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.
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 based on net investment income, net realized gains and net unrealized appreciation as such income and/or gains are earned. Taxes may also be based on transactions in foreign currency and are accrued based on the value of investments denominated in such currency.
FASB ASC 740-10, “Income Taxes — Overall”, sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. Management has concluded there are no significant uncertain tax positions that would require recognition in the financial statements. If applicable, the Fund recognizes interest accrued related to unrecognized tax benefits in “Interest Expense” and penalties in “Other Expenses” in the Statement of Operations. The Fund files tax returns with the U.S. Internal Revenue Service, New York and various states. Generally, each of
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Notes to Financial Statements (cont'd)
the tax years in the four-year period ended October 31, 2022 remains subject to examination by taxing authorities.
The tax character of distributions paid may differ from the character of distributions shown for GAAP purposes due to short-term capital gains being treated as ordinary income for tax purposes. The tax character of distributions paid during fiscal years 2022 and 2021 was as follows:
2022 Distributions Paid From:
|
2021 Distributions Paid From:
|
|
|
|
|
|
|
|
|
|
|
The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from GAAP. These book/tax differences are either considered temporary or permanent in nature.
Temporary differences are attributable to differing book and tax treatments for the timing of the recognition of gains (losses) on certain investment transactions, the timing of the deductibility of certain expenses and the recognition of premium amortization.
Permanent differences, due to a net operating loss, resulted in the following reclassifications among the components of net assets at October 31, 2022:
Total
Accumulated
Loss
(000)
|
|
|
|
|
At October 31, 2022, the Fund had no distributable earnings on a tax basis.
At October 31, 2022, the Fund had available for federal income tax purposes unused short-term and long-term capital losses of approximately $17,066,000 and $131,558,000, respectively, that do not have an expiration date.
To the extent that capital loss carryforwards are used to offset any future capital gains realized, 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. The amount of net investment income to be paid by the Fund is determined in accordance with federal income tax regulations. It is possible that all or a portion of the Fund's fiscal year 2023 dividend may be a return of capital and that determination cannot yet be made.
F.Security Transactions and Transactions with Affiliates:For six months ended April 30, 2023, purchases and sales of investment securities for the Fund, other than long-term U.S. Government securities and short-term investments were approximately $118,250,000 and $116,650,000, respectively. There were no purchases and sales of long-term U.S. Government securities for the six months ended April 30, 2023.
The Fund invests in the Institutional Class of the Morgan Stanley Institutional Liquidity Funds — Treasury Securities Portfolio (the “Liquidity Funds”), an open-end management investment company managed by the Adviser. Advisory fees paid by the Fund are reduced by an amount equal to its pro-rata share of the advisory and administration fees paid by the Fund due to its investment in the Liquidity Funds. For the six months ended April 30, 2023, advisory fees paid were reduced by approximately $11,000 relating to the Fund’s investment in the Liquidity Funds.
A summary of the Fund’s transactions in shares of affiliated investments during the six months ended April 30, 2023 is as follows:
Affiliated
Investment
Company
|
Value
October 31,
2022
(000)
|
|
Proceeds
From Sales
(000)
|
|
|
|
|
|
|
|
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Notes to Financial Statements (cont'd)
Affiliated
Investment
Company (cont'd)
|
Realized
Gain (Loss)
(000)
|
Change in
Unrealized
Appreciation
(Depreciation)
(000)
|
Value
April 30,
2023
(000)
|
|
|
|
|
|
The Fund is permitted to purchase and sell securities (“cross-trade”) from and to other Morgan Stanley funds as well as other funds and client accounts for which the Adviser or an affiliate of the Adviser serves as investment adviser, pursuant to procedures approved by the Directors in compliance with Rule 17a-7 under the Act (the “Rule”). Each cross-trade is executed at the current market price in compliance with provisions of the Rule. For the six months ended April 30, 2023, the Fund did not engage in any cross-trade transactions.
The Fund has an unfunded Deferred Compensation Plan (the“ Compensation Plan”), which allows each independent Director to defer payment of all, or a portion, of the fees he or she receives for serving on the Board of Directors. Each eligible Director generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the NAV of the Fund.
G.Credit Facility: The Fund will use the proceeds from the use of leverage to purchase additional securities consistent with the Fund’s investment objectives, policies and strategies. The Fund has entered into an agreement with State Street as Administrative Agent and sole lender to provide a revolving line of credit facility (“Facility”) in the amount of $200,000,000. The loans under the Facility will bear interest at the rate of London Interbank Offered Rate ("LIBOR") for the applicable interest period plus a spread. Effective June 30, 2023, the Facility will bear interest at the rate of Secured Overnight Financing Rate ("SOFR") plus a spread. The Facility also has a commitment fee
of 0.15% of the unused portion of the Facility, which is allocated among participating funds based on relative net assets. The average borrowings and interest rate for the six months ended April 30, 2023 were approximately $61,243,000 and 5.95%, respectively. During the same period, the Fund incurred approximately $1,832,000 in interest expense associated with the outstanding loans and commitment fee of approximately $105,000.
H.Other: As permitted by the Fund's offering prospectus, on January 10, 2008, the Fund commenced a share repurchase program for purposes of enhancing stockholder value and reducing the discount at which the Fund’s NAV, shares trade from their NAV. During the six months ended April 30, 2023, the Fund repurchased 241,675 of its shares at an average discount of 14.92% from NAV. Since the inception of the program, the Fund has repurchased 7,571,854 of its shares at an average discount of 14.75% from NAV. The Directors regularly monitor the Fund's share repurchase program as part of their review and consideration of the Fund's premium/discount history. The Fund expects to continue to repurchase its outstanding shares at such time and in such amounts as it believes will further the accomplishment of the foregoing objectives, subject to review by the Directors. You can access information about the monthly share repurchase results through Morgan Stanley Investment Management's website: www.morganstanley.com/im.
At April 30, 2023, the Fund had record owners of 10% or greater. Investment activities of these shareholders could have a material impact on the Fund. The aggregate percentage of such owners was 14.0%.
I.Market Risk: An investment in the Fund is based on the values of the Fund's investments, which may change due to economic and other events that affect markets generally, as well as those that affect particular regions, countries, industries, companies or governments. Social, political, economic and other
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Notes to Financial Statements (cont'd)
conditions and events, such as war, natural disasters, health emergencies (e.g., epidemics and pandemics), terrorism, conflicts, social unrest, recessions, inflation, rapid interest rate changes and supply chain disruptions, may occur and could significantly impact issuers, industries, governments and other systems, including the financial markets and global economy. It is difficult to predict when events affecting the U.S. or global financial markets may occur, the effects that such events may have and the duration of those effects (which may last for extended periods). These events may be sudden and significant and may negatively impact broad segments of businesses and populations and have a significant and rapid negative impact on the performance of and/or income or yield from the Fund's investments and exacerbate pre-existing risks to the Fund. For example, the extent of the impact of a public health emergency depends on future developments, including (i) the duration and spread of the public health emergency, (ii) the restrictions and advisories, (iii) the effects on the financial markets, (iv) government and regulatory responses, and (v) the effects on the economy overall as a result of developments such as disruption to consumer demand, economic output and supply chains. The occurrence, duration and extent of these or other types of adverse economic and market conditions and uncertainty over the long term cannot be reasonably projected or estimated at this time. The ultimate impact of public health emergencies or other adverse economic or market developments and the extent to which the associated conditions impact the Fund will also depend on other future developments, which are highly uncertain, difficult to accurately predict and subject to change at any time. The financial performance of the Fund's investments (and, in turn, the Fund's investment results) as well as their liquidity may be adversely affected because of these and similar types of factors and developments.
J.LIBOR Discontinuance or Unavailability Risk:LIBOR is intended to represent the rate at which contributing banks may obtain short-term borrowings from each other in the
London interbank market. The Financial Conduct Authority (the “FCA”), which is the regulatory authority that oversees financial services firms, financial markets in the U.K. and the administrator of LIBOR, announced that, after the end of 2021, one-week and two-month U.S. Dollar LIBOR and all non-U.S. Dollar LIBOR settings have either ended or are no longer representative of the underlying market they seek to measure. The FCA also announced that the most commonly used U.S. Dollar LIBOR settings may continue to be provided on a representative basis until the end of June 2023. However, in connection with supervisory guidance from regulators, some regulated entities may no longer enter into most new LIBOR-based contracts. As a result of the foregoing, LIBOR may no longer be available or no longer deemed an appropriate reference rate upon which to determine the interest rate on or impacting certain derivatives and other instruments or investments held by the Fund. In light of this eventuality, public and private sector industry initiatives are currently underway to establish new or alternative reference rates to be used in place of LIBOR. There is no assurance that the composition or characteristics of any such alternative reference rate will be similar to or produce the same value or economic equivalence as LIBOR or that it will have the same volume or liquidity as did LIBOR prior to its discontinuance or unavailability, which may affect the value or liquidity or return on certain of the Fund’s investments and result in costs incurred in connection with closing out positions and entering into new trades.
Neither the effect of the LIBOR transition process nor its ultimate success can yet be known. The transition process might lead to increased volatility and illiquidity in markets for, and reduce the effectiveness of hedges placed against, instruments whose terms currently include LIBOR. While some existing LIBOR-based instruments may contemplate a scenario where LIBOR is no longer available by providing for an alternative rate-setting methodology, there may be significant uncertainty regarding the effectiveness of any such alternative methodologies
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Notes to Financial Statements (cont'd)
to replicate LIBOR. Some of the Fund’s investments may be so-called “tough legacy” LIBOR instruments which may not have effective alternative rate-setting provisions or may involve counterparties who are unwilling to add or exercise rights under alternative rate-setting provisions in such instruments. On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act was signed into law. This law provides a statutory fallback mechanism on a nationwide basis to replace U.S. Dollar LIBOR with a benchmark rate that is selected by the Board of Governors of the Federal Reserve System based on the Secured Overnight Financing Rate (“SOFR”) for tough legacy contracts. On February 27, 2023, the final rule in connection with this law became effective, establishing benchmark replacements based on SOFR and Term SOFR (a forward-looking measurement of market expectations of SOFR implied from certain derivatives markets) for applicable tough legacy contracts governed by U.S. law. In addition, the FCA has announced that it will require the publication of the one-month, three-month and six-month U.S. Dollar LIBOR settings on the basis of a changed methodology (known as “synthetic LIBOR”), after June 30, 2023 through at least September 30, 2024, addressing non-U.S. law governed U.S. Dollar LIBOR instruments, but this synthetic LIBOR will be designated by the FCA as unrepresentative of the underlying market that it seeks to measure and will be solely available for use in legacy transactions. The transition of investments from LIBOR to a replacement rate as a result of amendment, application of existing fallbacks, statutory requirements, the application of synthetic LIBOR or otherwise may also result in a reduction in the value of certain instruments held by the Fund or a reduction in the effectiveness of related Fund transactions such as hedges. In addition, a liquid market for newly-issued instruments that use a reference rate other than LIBOR is still developing. There may also be challenges for the Fund to enter into hedging transactions against such newly-issued instruments until a market for such hedging transactions more fully develops. All of the aforementioned may adversely
affect the Fund’s investments (including their volatility, value and liquidity) and, as a result, the performance or NAV.
For More Information About Portfolio Holdings
The Fund provides a complete schedule of portfolio holdings in its Semi-Annual and Annual Reports within 60 days of the end of the Fund’s second and fourth fiscal quarters. The Semi-Annual Reports and the Annual Reports are filed electronically with the Securities and Exchange Commission ("SEC") on Form N-CSRS and Form N-CSR, respectively. Morgan Stanley also delivers the Semi-Annual and Annual Reports to Fund stockholders and makes these reports available on its public website, www.morganstanley.com/im/closedendfundsshareholderreports. Each Morgan Stanley non-money market fund also files a complete schedule of portfolio holdings with the SEC for the Fund’s first and third fiscal quarters as an attachment to Form N-PORT. Morgan Stanley does not deliver the reports for the first and third fiscal quarters to stockholders, but makes the complete schedule of portfolio holdings for the fund’s first and third fiscal quarters available on its public website. The holdings for each money market fund are also posted to the Morgan Stanley public website. You may obtain the Form N-PORT filings (as well as the Form N-CSR and N-CSRS filings) by accessing the SEC’s website, www.sec.gov. You can also request copies of these materials, upon payment of a duplicating fee, by electronic request at the SEC’s e-mail address (publicinfo@sec.gov).
In addition to filing a complete schedule of portfolio holdings with the SEC each fiscal quarter, the Fund makes portfolio holdings information available by providing the information on its public website, www.morganstanley.com/im/closedendedfundsshareholderreports. The Fund provides a complete schedule of portfolio holdings on the public website on a monthly basis at least 15 calendar days after month end and under other conditions as described in the Fund’s policy on
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Notes to Financial Statements (cont'd)
portfolio holdings disclosure. You may obtain copies of the Fund’s monthly website postings by calling toll free 1(800) 231-2608.
Proxy Voting Policy 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, is available without charge, upon request, by calling toll free 1(800) 231-2608 or by visiting our website at www.morganstanley.com/im/closedendfundsshareholderreports. This information is also available on the SEC’s web site at www.sec.gov.
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Portfolio Management
The Fund is managed by members of the Emerging Markets Debt team. The team consists of portfolio managers, analysts and traders.
For the period of the report, the members of the team jointly and primarily responsible for the day-to-day management of the
Fund are Sahil Tandon, a Managing Director of the Sub-Adviser, Brian Shaw and Patrick Campbell, each an Executive Director of the
Adviser. Mr. Tandon has been associated with the Sub-Adviser in an investment management capacity since August 2019. Prior
to August 2019, Mr. Tandon was associated with the Adviser in an investment capacity from 2004. Mr. Tandon began managing the
Fund in October 2015. Mr. Shaw has been associated with the Adviser or its affiliates in an investment management capacity
since December 2008. Mr. Campbell has been associated with the Adviser or its affiliates in an investment management capacity since
June 2008.
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Investment Policy
The Fund's investment objectives may be changed without stockholder approval; however, stockholders will be notified in writing
of any changes at least 60 days' prior to any change. The Fund seeks to achieve its investment objectives by investing, under
normal circumstances, at least 80% of its managed assets in emerging markets domestic debt. The Fund's investment process incorporates
information about environmental, social and governance issues (also referred to as ESG) via an integrated approach within
the investment team's fundamental investment analysis framework. The Adviser may engage with management of certain issuers regarding
corporate governance practices as well as what the Adviser deems to be materially important environmental and/or social issues
facing a company. To the extent the Fund invests in derivative instruments that the Adviser believes have economic characteristics
similar to such securities, including, but not limited to, emerging market currency derivatives and swap agreements, such investments
will be counted for purposes of meeting the Fund's 80% policy.
Emerging markets domestic debt refers to debt obligations of issuers located in emerging market countries that are denominated
in the local currency. "Managed Assets" means the total assets of the Fund, which includes any proceeds from the issuance by the
Fund of preferred shares and other borrowings for investment purposes, minus the sum of accrued liabilities (other than indebtedness
attributable to leverage). The debt obligations currently include (i) Sovereign Debt Obligations and (ii) debt obligations
of non-governmental issuers located in emerging markets, including bonds, convertible securities and commercial paper. For purposes of the Fund's policies, an issuer is located in an emerging market country if (i) the principal trading market for its securities
is in an emerging market country, (ii) alone or on a consolidated basis it derives 50% or more of its annual revenue from either goods produced,
sales made or services performed in an emerging market country or countries or (iii) it is a government entity of, is organized
under the laws of, or has a principal office in, an emerging market country. Certain of the issuers that fall within categories (ii)
and (iii) above may or may not have a principal trading market in an emerging market country and, while exposing the Fund's assets to the
economic benefits of investing in an emerging market country, may not do so to the same extent as an issuer with a principal trading
market in an emerging market country. Emerging market countries are countries that the World Bank has determined to have a low or middle-income economy. Emerging market countries may include any country in the world except the United States, Canada, Japan, Australia, New Zealand and most countries located in Western Europe. The Fund's organizational documents provide no limit
on the percentage of the Fund's Managed Assets that may be invested in a single country. The Fund may invest in emerging market countries
such as Indonesia, Malaysia, Thailand, the Czech Republic, Hungary, Poland, Russia, Slovakia, Turkey, South Africa, Brazil,
Chile, Colombia, Mexico and Peru. The Fund may invest, without limitation, in securities that are rated below investment grade by
a nationally recognized statistical rating organization or unrated securities that are deemed to be of comparable quality by
the Adviser. Debt securities rated below investment grade are commonly known as "junk bonds" and are regarded as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations
and involve major risk exposure to adverse conditions. The Fund's holdings may range in maturity from overnight to 30 years or more. The
Fund may also invest in warrants, structured investments or other Strategic Transactions, which may be used to maintain exposure
of at least 80% of its assets to debt obligations of issuers located in emerging market countries that are denominated in the local currency.
Under certain limited circumstances, the Fund's investments may be all or substantially all invested in warrants, structured investments
or other Strategic Transactions.
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Investment Policy (cont'd)
In addition, the Fund may invest up to 20% of its Managed Assets in Strategic Transactions, which will not be used to maintain
exposure of at least 80% of its assets to debt obligations of issuers located in emerging market countries that are denominated
in the local currency, and in currencies of emerging market countries and other types of investments, including shares of open- and
closed-end investment companies, common stocks, bonds, convertible securities, money market and short-term debt securities and cash
equivalents. The Fund's 80% policy may be changed without stockholder approval; however, stockholders will be notified in
writing of any changes at least 60 days' prior to any change.
The Fund's Investments
The Fund will invest primarily in debt obligations of issuers located in emerging market countries that are denominated in
the local currency. The Adviser will implement a multi-phase investment process, with an emphasis on sovereign economic fundamentals,
to assess sovereign risk and the relative valuations of currencies and interest rates in emerging market countries. As part of
its assessment, the Adviser will analyze a country's political, economic and social environment. The Adviser will focus on change at the margin
rather than taking static snapshots of economic variables and will seek to interpret events and forces in their early stages and
to assess their impact on individual emerging market countries.
The Adviser implements a top down assessment of the global economic environment and the sensitivity of emerging economies
in general to worldwide events. The Adviser will analyze economic factors, including governmental policies (fiscal, monetary
and exchange rates regimes) and objectives (GDP growth, inflation, external accounts, debt serviceability). In selecting the Fund's
investments, the Adviser analyzes the ability of an emerging market country's government to formulate and implement fiscal
and economic policies; socio-political factors, including political risks, election calendars, human development and social stability;
and exchange rate and interest rate valuation. In addition, the Adviser analyzes long-term equilibrium real exchange rates, utilizing
a proprietary econometric model that considers the impact of various fundamental variables, including productivity differentials,
terms of trade and external positions. The Adviser will utilize a proprietary interest rate and yield curve valuation model to identify
investment opportunities. The Fund's investments include:
Portfolio Composition
Sovereign Debt Obligations. Debt obligations known as "sovereign debt" are obligations of governmental issuers in emerging market countries that are denominated in the local currency of the country of issuance and industrialized countries. "Sovereign Debt
Obligations" include (i) debt securities issued or guaranteed by governments, government agencies or instrumentalities and
political subdivisions, (ii) debt securities issued by government owned, controlled or sponsored entities, (iii) interests in entities
organized and operated for the purposes of restructuring the investment characteristics of instruments issued by any of the above issuers
or (iv) participation in loans between emerging market governments and financial institutions.
Corporate Debt Obligations. The Fund may invest in debt obligations of non-governmental issuers located in emerging market countries and denominated in the local currency. Corporate debt obligations generally represent an issuer's obligation to
repay to the investor (or lender) the amount borrowed plus interest over a specified time period. A typical corporate bond specifies a
fixed date
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Investment Policy (cont'd)
when the amount borrowed (principal) is due in full, known as the maturity date, and specifies dates when periodic interest
(coupon) payments will be made over the life of the security.
Corporate debt obligations come in many varieties and may differ in the way that interest is calculated, the amount and frequency
of payments, the type of collateral, if any, and the presence of special features (e.g., conversion rights). The Fund's investments
in bonds and notes. The Fund may invest in convertible bonds and warrant structures, which are fixed income securities with imbedded
warrants which are exercisable into other debt or equity securities, provided that upon conversion of such securities into
equity securities, such equities are promptly disposed of.
Other Debt Obligations. The Fund may invest up to 20% of its Managed Assets in debt obligations other than those of issuers located in emerging market countries and denominated in the local currency, including, but not limited to, eurobonds, Yankee dollar
obligations, global bonds and Brady Bonds.
Currency. The Fund is no longer limited to investing 20% of its Managed Assets in currencies of selected emerging market countries.
Loan Participations and Assignments. The Fund may invest in fixed and floating rate loans arranged through private negotiations between an issuer of Sovereign Debt Obligations and one or more financial institutions. The Fund's investments in Loans in
most instances will be in the form of participations in Loans or assignments of all or a portion of Loans from third parties. The
Fund's investment in Participations typically will result in the Fund having a contractual relationship only with the Lender and
not with the borrower. The Fund will have the right to receive payments of principal, interest and any fees to which it is entitled only
from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower.
When the Fund purchases Assignments from Lenders it will acquire direct rights against the borrower on the Loan. Because Assignments are arranged through private negotiations between potential assignees and potential assignors, however, the rights
and obligations acquired by the Fund as the purchaser of an Assignment may differ from, and be more limited than, those held by
the assigning Lender. The assignability of certain Sovereign Debt Obligations is restricted by the governing documentation as
to the nature of the assignee such that the only way in which the Fund may acquire an interest in a Loan is through a Participation
and not an Assignment.
Derivatives
The Fund may, but it is not required to, use derivative instruments for a variety of purposes, including hedging, risk management,
portfolio management or to earn income. A derivative is a financial instrument whose value is based, in part, on the value
of an underlying asset, interest rate, index or financial instrument. Prevailing interest rates and volatility levels, among other
things, also affect the value of derivative instruments. A derivative instrument often has risks similar to its underlying asset and may
have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default
by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities,
instruments, indices or interest rates to which the derivative instrument relates, risks that the transactions may not be liquid and risks
arising from
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Investment Policy (cont'd)
margin requirements. The use of derivatives involves risks that are different from, and possibly greater than, the risks associated
with other portfolio investments. Derivatives may involve the use of highly specialized instruments that require investment techniques
and risk analyses different from those associated with other portfolio investments. In addition, proposed regulatory changes by
the Securities and Exchange Commission (“SEC”) relating to a mutual fund’s use of derivatives could potentially limit or impact the Fund’s ability to invest in derivatives and adversely affect the value or performance of the Fund or its derivative investments.
Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk
of loss. Leverage associated with derivative transactions may cause the Fund to liquidate portfolio positions when it may not be advantageous
to do so to satisfy its obligations or to meet earmarking or segregation requirements, pursuant to applicable SEC rules and
regulations, or may cause the Fund to be more volatile than if the Fund had not been leveraged. Although the Adviser seeks to use derivatives
to further the Fund’s investment objective, there is no assurance that the use of derivatives will achieve this result.
Additional information about the derivative instruments and techniques that the Fund may use and their associated risks are
included in the Fund’s annual report.
Following is a description of the derivative instruments and techniques that the Fund may use and their associated risks:
Foreign Currency Forward Exchange Contracts. In connection with its investments in foreign securities, the Fund also may enter into contracts with banks, brokers or dealers to purchase or sell securities or foreign currencies at a future date. A foreign
currency forward exchange contract (“currency contract”) is a negotiated agreement between the contracting parties to exchange a specified amount of currency at a specified future time at a specified rate. The rate can be higher or lower than the spot rate between the currencies
that are the subject of the contract. The Fund may also invest in non-deliverable foreign currency forward exchange contracts (“NDFs”). NDFs are similar to other foreign currency forward exchange contracts, but do not require or permit physical delivery of currency
upon settlement. Instead, settlement is made in cash based on the difference between the contracted exchange rate and the
spot foreign exchange rate at settlement. Currency contracts may be used to protect against uncertainty in the level of future foreign
currency exchange rates or to gain or modify exposure to a particular currency. In addition, the Fund may use cross currency hedging
or proxy hedging with respect to currencies in which the Fund has or expects to have portfolio or currency exposure. Cross currency
and proxy hedges involve the sale of one currency against the positive exposure to a different currency and may be used for hedging
purposes or to establish an active exposure to the exchange rate between any two currencies. To the extent hedged by the use of currency
contracts, the precise matching of the currency contract amounts and the value of the securities involved will not generally be possible
because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of
those securities between the date on which the contract is entered into and the date it matures. Furthermore, such transactions
may reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken.
There is additional risk that such transactions may reduce or preclude the opportunity for gain if the value of the currency should
move in the direction opposite to the position taken and that currency contracts create exposure to currencies in which the Fund’s securities are not denominated. The use of currency contracts involves the risk of loss from the insolvency or bankruptcy of the counterparty
to the contract or the failure of the counterparty to make payments or otherwise comply with the terms of the contract.
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Investment Policy (cont'd)
Futures. A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an underlying asset,
reference rate or index at a specific price at a specific future time. The value of a futures contract tends to increase or
decrease in tandem with the value of the underlying instrument. Depending on the terms of the particular contract, futures contracts are
settled through either physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount
on the settlement date. A decision as to whether, when and how to use futures contracts involves the exercise of skill and judgment
and even a well-conceived futures transaction may be unsuccessful because of market behavior or unexpected events. In addition
to the derivatives risks discussed above, the prices of futures contracts can be highly volatile, using futures contracts can lower
total return and the potential loss from futures contracts can exceed the Fund’s initial investment in such contracts. No assurance can be given that a liquid market will exist for any particular futures contract at any particular time. There is also the risk of loss by the
Fund of margin deposits in the event of bankruptcy of a broker with which the Fund has open positions in the futures contract.
Loan Participation Notes. The Fund may invest in loan participation notes (“LPNs”), which are interests in loans or other direct debt instruments relating to amounts owed by a corporate, governmental or other borrower to another party. LPNs are notes
issued through a special purpose vehicle for the purpose of funding or acquiring a loan to final obligor. LPNs are subject to the
same risks as other debt obligations, which may include credit risk, interest rate risk, liquidity risk and market risk. LPNs have limited
recourse to the issuer, to the extent of the amount received by the issuer from the ultimate borrower in paying the principal and interest
amounts as defined under the loan agreement. The Fund may be exposed to the credit risk of both the lender and the borrower, and may
not benefit from any collateral supporting the underlying loan.
Options. If the Fund buys an option, it buys a legal contract giving it the right to buy or sell a specific amount of the underlying
instrument or futures contract on the underlying instrument or foreign currency at an agreed-upon price typically in exchange
for a premium paid by the Fund. If the Fund sells an option, it sells to another person the right to buy from or sell to the Fund
a specific amount of the underlying instrument or foreign currency or futures contract on the underlying instrument or foreign currency
at an agreed-upon price typically in exchange for a premium received by the Fund. When options are purchased over-the-counter (“OTC”), the Fund bears the risk that the counterparty that wrote the option will be unable or unwilling to perform its obligations
under the option contract. Options may also be illiquid and the Fund may have difficulty closing out its position. A decision as to
whether, when and how to use options involves the exercise of skill and judgment and even a well-conceived option transaction may be
unsuccessful because of market behavior or unexpected events. The prices of options can be highly volatile and the use of
options can lower total returns.
Structured Investments. The Fund also may invest a portion of its assets in structured investments. A structured investment is a derivative security designed to offer a return linked to a particular underlying security, currency, commodity or market.
Structured investments may come in various forms including notes (such as exchange-traded notes), warrants and options to purchase securities.
The Fund will typically use structured investments to gain exposure to a permitted underlying security, currency, commodity
or market when direct access to a market is limited or inefficient from a tax or cost standpoint. There can be no assurance that
structured investments will trade at the same price or have the same value as the underlying security, currency, commodity or market.
Investments in structured investments involve risks including issuer risk, counterparty risk and market risk. Holders of structured
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Investment Policy (cont'd)
investments bear risks of the underlying investment and are subject to issuer or counterparty risk because the Fund is relying
on the creditworthiness of such issuer or counterparty and has no rights with respect to the underlying investment. Certain structured
investments may be thinly traded or have a limited trading market and may have the effect of increasing the Fund’s illiquidity to the extent that the Fund, at a particular point in time, may be unable to find qualified buyers for these securities.
Swaps. The Fund may enter into OTC swap contracts or cleared swap transactions. An OTC swap contract is an agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional
amount, with the payments calculated by reference to specified securities, indices, reference rates, currencies or other instruments.
Typically swap agreements provide that when the period payment dates for both parties are the same, the payments are made on a net basis
(i.e., the two payment streams are netted out, with only the net amount paid by one party to the other). The Fund’s obligations or rights under a swap contract entered into on a net basis will generally be equal only to the net amount to be paid or received under
the agreement, based on the relative values of the positions held by each party. Cleared swap transactions may help reduce counterparty
credit risk. In a cleared swap, the Fund’s ultimate counterparty is a clearinghouse rather than a swap dealer, bank or other financial institution. OTC swap agreements are not entered into or traded on exchanges and often there is no central clearing or guaranty
function for swaps. These OTC swaps are often subject to credit risk or the risk of default or non- performance by the counterparty.
Both OTC and cleared swaps could result in losses if interest rates, foreign currency exchange rates or other factors are
not correctly anticipated by the Fund or if the reference index, security or investments do not perform as expected. The Fund’s use of swaps may include those based on the credit of an underlying security, commonly referred to as “credit default swaps.” Where the Fund is the buyer of a credit default swap contract, it would typically be entitled to receive the par (or other agreed-upon) value of
a referenced debt obligation from the counterparty to the contract only in the event of a default or similar event of the issuer of the
referenced debt obligation. If no default occurs, the Fund would have paid to the counterparty a periodic stream of payments over the term
of the contract and received no benefit from the contract. When the Fund is the seller of a credit default swap contract, it typically
receives the stream of payments but is obligated to pay an amount equal to the par (or other agreed-upon) value of a referenced debt
obligation upon the default or similar event of the issuer of the referenced debt obligation. The Dodd-Frank Wall Street Reform and Consumer
Protection Act and related regulatory developments require the clearing and exchange-trading of certain standardized swap
transactions. Mandatory exchangetrading and clearing is occurring on a phased-in basis.
Special Risks Related to Cyber Security
The Fund and its service providers are susceptible to cyber security risks that include, among other things, theft, unauthorized
monitoring, release, misuse, loss, destruction or corruption of confidential and highly restricted data; denial of service
attacks; unauthorized access to relevant systems; compromises to networks or devices that the Fund and its service providers use to
service the Fund’s operations; or operational disruption or failures in the physical infrastructure or operating systems that support the Fund and its service providers. Cyber attacks against or security breakdowns of the Fund or its service providers may adversely impact
the Fund and its stockholders, potentially resulting in, among other things, financial losses; the inability of Fund stockholders to
transact business and the Fund to process transactions; inability to calculate the Fund’s NAV; violations of applicable privacy and other laws; regulatory fines, penalties, reputational damage, reimbursement or other compensation costs; and/or additional compliance
costs. The Fund may incur additional costs for cyber security risk management and remediation purposes. In addition, cyber security risks
may
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Investment Policy (cont'd)
also impact issuers of securities in which the Fund invests, which may cause the Fund’s investment in such issuers to lose value. There can be no assurance that the Fund or its service providers will not suffer losses relating to cyber attacks or other information
security breaches in the future.
Market and Geopolitical Risk
The value of your investment in the Fund is based on the values of the Fund’s investments, which may change due to economic and other events that affect markets generally, as well as those that affect particular regions, countries, industries, companies
or governments. These movements, sometimes called volatility, may be greater or less depending on the types of securities the
Fund owns and the markets in which the securities trade. Volatility and disruption in financial markets and economies may be sudden
and unexpected, expose the Fund to greater risk, including risks associated with reduced market liquidity and fair valuation,
and adversely affect the Fund’s operations. For example, the Adviser potentially will be prevented from executing investment decisions at an advantageous time or price as a result of any domestic or global market disruptions and reduced market liquidity may impact
the Fund’s ability to sell securities to meet redemptions.
The increasing interconnectivity between global economies and financial markets increases the likelihood that events or conditions
in one region or financial market may adversely impact issuers in a different country, region or financial market. Securities in the Fund’s portfolio may underperform due to inflation (or expectations for inflation), interest rates, global demand for particular
products or resources, natural disasters, health emergencies (such as epidemics and pandemics), terrorism, regulatory events and governmental
or quasigovernmental actions. The occurrence of global events similar to those in recent years, such as terrorist attacks around
the world, natural disasters, health emergencies, social and political discord or debt crises and downgrades, among others, may result
in market volatility and may have long term effects on both the U.S. and global financial markets. Other financial, economic and other
global market and social developments or disruptions may result in similar adverse circumstances, and it is difficult to predict
when similar events affecting the U.S. or global financial markets may occur, the effects that such events may have and the duration of
those effects (which may last for extended periods). In general, the securities or other instruments that the Adviser believes represent
an attractive investment opportunity or in which the Fund seeks to invest may be unavailable entirely or in the specific quantities sought
by the Fund. As a result, the Fund may need to obtain the desired exposure through a less advantageous investment, forgo the investment
at the time or seek to replicate the desired exposure through a derivative transaction or investment in another investment vehicle.
Any such event(s) could have a significant adverse impact on the value and risk profile of the Fund’s portfolio. There is a risk that you may lose money by investing in the Fund.
Social, political, economic and other conditions and events, such as natural disasters, health emergencies (e.g., the novel
coronavirus outbreak, epidemics and other pandemics), terrorism, conflicts and social unrest, could reduce consumer demand or economic
output, result in market closures, travel restrictions or quarantines, and generally have a significant impact on the economies and
financial markets and the Adviser’s investment advisory activities and services of other service providers, which in turn could adversely affect the Fund’s investments and other operations.
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Investment Policy (cont'd)
Foreign and Emerging Market Securities
Investing in the securities of foreign issuers, particularly those located in emerging market or developing countries, entails
the risk that news and events unique to a country or region will affect those markets and their issuers. The value of the Fund's shares
may vary widely in response to political and economic factors affecting companies in foreign countries. These same events will not
necessarily have an effect on the U.S. economy or similar issuers located in the United States. In addition, investments in certain foreign
markets that have historically been considered stable may become more volatile and subject to increased risk due to ongoing developments
and changing conditions in such markets. Moreover, the growing interconnectivity of global economies and financial markets has
increased the probability that adverse developments and conditions in one country or region will affect the stability of economies
and financial markets in other countries or regions.
Investments in foreign markets entail special risks such as currency, political, economic and market risks. There also may
be greater market volatility, less reliable financial information, higher transaction and custody costs, decreased market liquidity and
less government and exchange regulation associated with investments in foreign markets. Certain foreign markets may rely heavily
on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions
against a particular country or countries, organizations, entities and/or individuals, changes in international trading patterns,
trade barriers and other protectionist or retaliatory measures. Economic sanctions could, among other things, effectively restrict
or eliminate the Fund's ability to purchase or sell securities or groups of securities for a substantial period of time, and may make the
Fund's investments in such securities harder to value. Investments in foreign markets may also be adversely affected by governmental
actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets or the imposition
of punitive taxes. The governments of certain countries may prohibit or impose substantial restrictions on foreign investing
in their capital markets or in certain sectors or industries. In addition, a foreign government may limit or cause delay in the convertibility
or repatriation of its currency which would adversely affect the U.S. dollar value and/or liquidity of investments denominated
in that currency. Certain foreign investments may become less liquid in response to market developments or adverse investor perceptions,
or become illiquid after purchase by the Fund, particularly during periods of market turmoil. When the Fund holds illiquid investments,
its portfolio may be harder to value. The risks of investing in emerging market countries are greater than risks associated
with investments in foreign developed countries. In addition, the Fund's investments in foreign issuers may be denominated in foreign
currencies and therefore, to the extent unhedged, the value of the investment will fluctuate with the U.S. dollar exchange
rates.
Chinese Fixed-Income Investments
The Fund may invest in Chinese fixed-income securities traded in the China Interbank Bond Market (“CIBM”) through the Bond Connect program (“Bond Connect”), which allows non-Chinese-domiciled investors (such as the Fund) to purchase certain fixed-income investments available in China’s interbank bond market. Bond Connect utilizes the trading infrastructure of both Hong Kong and China. Bond Connect therefore is not available when there are trading holidays in Hong Kong. As a result, prices of securities
purchased through Bond Connect may fluctuate at times when the Fund is unable to add to or exit its position. Securities offered
via Bond Connect may lose their eligibility for trading through the program at any time, in which case they may be sold but could
no longer be purchased through Bond Connect. Because Bond Connect is relatively new, its effects on the Chinese interbank bond
are uncertain. In addition, the trading, settlement and IT systems required for non-Chinese investors in Bond Connect are relatively
new
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Investment Policy (cont'd)
and continuing to evolve. In the event that the relevant systems do not function properly, trading via Bond Connect could
be disrupted, adversely affecting the ability of the Fund to acquire or dispose of securities through Bond Connect in a timely
manner, which in turn could adversely impact the Fund’s performance.
Bond Connect is subject to regulation by both Hong Kong and China. There can be no assurance that further regulations will
not affect the availability of securities in the program, the frequency of redemptions or other limitations. In China, Bond Connect
securities are held on behalf of ultimate investors (such as the Fund) by the Hong Kong Monetary Authority Central Money Markets
Unit via accounts maintained with China’s two clearinghouses for fixed-income securities. While Chinese regulators have affirmed that the ultimate investors hold a beneficial interest in Bond Connect securities, the law surrounding such rights continues
to develop, and the mechanisms that beneficial owners may use to enforce their rights are untested and therefore pose uncertain risks,
with legal and regulatory risks potentially having retroactive effect. Further, courts in China have limited experience in applying the
concept of beneficial ownership, and the law surrounding beneficial ownership will continue to evolve as they do so. There is accordingly
a risk that, as the law is tested and developed, the Fund’s ability to enforce its ownership rights may be negatively impacted, which could expose the Fund to the risk of loss on such investments. The Fund may not be able to participate in corporate actions affecting
Bond Connect securities due to time constraints or for other operational reasons, and payments of distributions could be delayed.
Market volatility and potential lack of liquidity due to low trading volume of certain bonds may result in prices of those bonds
fluctuating significantly; in addition, the bid-ask spreads of the prices of such securities may be large, and the Fund may therefore
incur significant costs and suffer losses when selling such investments. More generally, bonds traded in CIBM may be difficult or impossible
to sell, which could further impact the Fund’s ability to acquire or dispose of such securities at their expected prices. Bond Connect trades are settled in Renminbi (RMB), the Chinese currency, and investors must have timely access to a reliable supply of RMB in Hong
Kong, which cannot be guaranteed. Moreover, securities purchased through Bond Connect generally may not be sold, purchased or otherwise transferred other than through Bond Connect in accordance with applicable rules. Finally, uncertainties in the Chinese
tax rules governing taxation of income and gains from investments via Bond Connect could result in unexpected tax liabilities
for the Fund. The withholding tax treatment of dividends and capital gains payable to overseas investors currently is unsettled.
Environmental, Social and Governance Issues
The Fund's investment process incorporates information about environmental, social and governance issues (also referred to
as ESG) via an integrated approach within the investment team's fundamental investment analysis framework. The Fund's Adviser may
engage with management of certain issuers regarding corporate governance practices as well as what the Fund's Adviser deems to be
materially important environmental and/or social issues facing a company.
Temporary Investments
The investment policies, limitations or practices of the Fund may not apply during periods of unusual or adverse market, economic,
political or other conditions. Such market, economic, political or other conditions may include periods of abnormal or heightened
market volatility, strained credit and/or liquidity conditions or increased governmental intervention in the markets or industries.
During such periods, the Fund may not invest according to its principal investment strategies or in the manner in which its
name may suggest, and may be subject to different and/or heightened risks. It is possible that such unusual or adverse conditions may
continue
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Investment Policy (cont'd)
for extended periods of time. During such periods, the Fund may, for temporary defensive purposes, reduce its holdings in
debt obligations of issuers located in emerging markets countries that are denominated in the local currency and invest in certain
liquid short-term (less than one year to maturity) and medium-term (not greater than five years to maturity) debt securities or hold
cash. The short-term and medium-term debt securities in which the Fund may invest consist of (a) obligations of the U.S., emerging market
or other foreign governments, their respective agencies or instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers’ acceptances) of U.S. or foreign banks denominated in any currency; (c) floating rate securities and other instruments denominated in any other currency issued by various governments or international development agencies;
(d) finance company and corporate commercial paper and other short-term corporate debt obligations of United States, emerging
market or other foreign corporations; and (e) repurchase agreements with banks and broker-dealers with respect to such securities.
The Fund intends to invest for temporary defensive purposes only in short-term and medium-term debt securities that the Adviser
believes to be of high quality, i.e., subject to relatively low risk of loss of interest or principal (there is currently no rating
system for debt securities in certain emerging market countries in which the Fund may invest).
Pricing of Securities
Certain of the Fund's securities may be valued by an outside pricing service approved by the Board. The pricing service/vendor
may utilize a matrix system or other model incorporating attributes such as security quality, maturity and coupon as the evaluation
model parameters, and/or research evaluations by its staff, including review of broker-dealer market price quotations in determining
what it believes is the fair valuation of the portfolio securities valued by such pricing service. Pricing services value securities
assuming orderly transactions of an institutional round lot size, but the Fund may hold or transact in such securities in smaller, odd lot
sizes. Odd lots often trade at lower prices than institutional round lots.
Determination of NAV
The Fund determines the NAV per share as of the close of the NYSE (normally 4:00 p.m. Eastern time) on each day that the NYSE
is open for business. Shares generally will not be priced on days that the NYSE is closed, although shares may be priced on such
days if the Securities Industry and Financial Markets Association ("SIFMA") recommends that the bond markets remain open for all or
part of the day. On any business day when SIFMA recommends that the bond markets close early, the Fund reserves the right to price
its shares at or prior to the SIFMA recommended closing time. If the NYSE is closed due to inclement weather, technology problems
or any other reason on a day it would normally be open for business, or the NYSE has an unscheduled early closing on a day it
has opened for business, the Fund reserves the right to treat such day as a business day and calculate its NAV as of the normally
scheduled close of regular trading on the NYSE for that day, so long as the Adviser believes there generally remains an adequate market
to obtain reliable and accurate market quotations. The Fund may elect to price its shares on days when the NYSE is closed but the primary
securities markets on which the Fund’s securities trade remain open.
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
Dividend Reinvestment Plan
Pursuant to the Dividend Reinvestment Plan (the Plan), each stockholder will be deemed to have elected, unless Computershare
Trust Company, N.A. (the Plan Agent) is otherwise instructed by the stockholder in writing, to have all distributions automatically
reinvested in Fund shares.
Dividend and capital gain distributions (Distribution) 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 or, 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 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 a Distribution 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. 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 Domestic Debt Fund, Inc.
Computershare Trust Company, N.A.
P.O. Box 505000
Louisville, Kentucky 40233
1 (800) 231-2608
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
U.S. Customer Privacy Notice April 2021
|
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WHAT DOES MSIM DO WITH YOUR PERSONAL INFORMATION?
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|
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Financial companies choose how they share your personal information. Federal law gives
consumers the right to limit some but not all sharing. Federal law also requires us to tell you how
we collect, share, and protect your personal information. Please read this notice carefully to
understand what we do.
|
|
|
The types of personal information we collect and share depend on the product or service you have
with us. This information can include:
◾
Social Security number and income
◾
investment experience and risk tolerance
◾
checking account number and wire transfer instructions
|
|
|
All financial companies need to share customers’ personal information to run their everyday
business. In the section below, we list the reasons financial companies can share their customers’
personal information; the reasons MSIM chooses to share; and whether you can limit this
sharing.
|
Reasons we can share your personal information
|
|
Can you limit this sharing?
|
For our everyday business purposes —
such as to process your transactions, maintain your
account(s), respond to court orders and legal investigations,
or report to credit bureaus
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For our marketing purposes —
to offer our products and services to you
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For joint marketing with other financial companies
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For our investment management affiliates’
everyday business purposes —
information about your transactions, experiences, and
creditworthiness
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For our affiliates’ everyday business purposes —
information about your transactions and experiences
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For our affiliates’ everyday business purposes —
information about your creditworthiness
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For our investment management affiliates to
market to you
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Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
U.S. Customer Privacy Notice (cont'd)April 2021
Reasons we can share your personal information
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Can you limit this sharing?
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For our affiliates to market to you
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For non-affiliates to market to you
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Call toll-free (844) 312-6327 or email: imprivacyinquiries@morganstanley.com
Please note:
If you are a new customer, we can begin sharing your information 30 days from the date we sent
this notice. When you are no longer our customer, we continue to share your information as
described in this notice. However, you can contact us at any time to limit our sharing.
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Call toll-free (844) 312-6327 or email: imprivacyinquiries@morganstanley.com
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Who is providing this notice?
|
Morgan Stanley Investment Management Inc. and its investment
management affiliates (“MSIM”) (see Investment Management
Affiliates definition below)
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How does MSIM protect my personal
information?
|
To protect your personal information from unauthorized access
and use, we use security measures that comply with federal law.
These measures include computer safeguards and secured files and
buildings. We have policies governing the proper handling of
customer information by personnel and requiring third parties
that provide support to adhere to appropriate security standards
with respect to such information.
|
How does MSIM collect my personal
information?
|
We collect your personal information, for example, when you
◾
open an account or make deposits or withdrawals from your
account
◾
buy securities from us or make a wire transfer
◾
give us your contact information
We also collect your personal information from others, such as
credit bureaus, affiliates, or other companies.
|
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
April 30, 2023 (unaudited)
U.S. Customer Privacy Notice (cont'd)April 2021
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Why can’t I limit all sharing?
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Federal law gives you the right to limit only
◾
sharing for affiliates’ everyday business purposes —
information about your creditworthiness
◾
affiliates from using your information to market to you
◾
sharing for non-affiliates to market to you
State laws and individual companies may give you additional
rights to limit sharing. See below for more on your rights under
state law.
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Investment Management Affiliates
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MSIM Investment Management Affiliates include registered
investment advisers, registered broker-dealers, and registered and
unregistered funds in the Investment Management Division.
Investment Management Affiliates does not include entities
associated with Morgan Stanley Wealth Management, such as
Morgan Stanley Smith Barney LLC and Morgan Stanley & Co.
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Companies related by common ownership or control. They can
be financial and non-financial companies.
◾
Our affiliates include companies with a Morgan Stanley
name and financial companies such as Morgan Stanley
Smith Barney LLC and Morgan Stanley & Co.
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Companies not related by common ownership or control. They
can be financial and non-financial companies.
◾
MSIM does not share with non-affiliates so they can
market to you.
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A formal agreement between non-affiliated financial companies
that together market financial products or services to you.
◾
MSIM doesn’t jointly market
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Other important information
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Vermont: Except as permitted by law, we will not share personal information we collect about Vermont residents with
Non-affiliates unless you provide us with your written consent to share such information.
|
California: Except as permitted by law, we will not share personal information we collect about California residents
with Non-affiliates and we will limit sharing such personal information with our Affiliates to comply with California
privacy laws that apply to us.
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(This page has been left blank intentionally.)]
Directors
Frank L. Bowman
Frances L. Cashman
Kathleen A. Dennis
Nancy C. Everett
Eddie A. Grier
Jakki L. Haussler
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Patricia A. Maleski
W. Allen Reed, Chair of the Board
Officers
John H. Gernon
President and Principal Executive Officer
Deidre A. Downes
Chief Compliance Officer
Francis J. Smith
Treasurer and Principal Financial Officer
Mary E. Mullin
Secretary
Michael J. Key
Vice President
Adviser and Administrator
Morgan Stanley Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
Sub-Adviser
Morgan Stanley Investment Management Limited
25 Cabot Square, Canary Wharf
London, E14 4QA, England
Custodian
State Street Bank and Trust Company
One Congress Street
Boston, Massachusetts 02114
Stockholder Servicing Agent
Computershare Trust Company, N.A.
P.O. Box 505000
Louisville, Kentucky 40233
Legal Counsel
Dechert LLP
1095 Avenue of the Americas
New York, New York 10036
Counsel to the Independent Directors
Perkins Coie LLP
1155 Avenue of the Americas,
22nd Floor
New York, New York 10036
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 toll free 1(800) 231-2608 or visit our website at www.morganstanley.com/im/closedendfundsshareholderreports. All investments involve
risks, including the possible loss of principal.
© 2023 Morgan Stanley
CEEDDSAN
5711082 EXP 06.30.24
Item 2. Code of Ethics.
Not
applicable for semiannual reports.
Item 3. Audit Committee Financial Expert.
Not
applicable for semiannual reports.
Item 4. Principal Accountant Fees and Services.
Not
applicable for semiannual reports.
Item 5. Audit Committee of Listed Registrants.
Not
applicable for semiannual reports.
Item 6.
(a) See Item 1.
(b) Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not
applicable for semiannual reports.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable
only to annual reports filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
REGISTRANT PURCHASE OF EQUITY SECURITIES
| Period | |
(a) Total Number of
Shares (or Units)
Purchased | | |
(b) Average Price Paid
per Share (or Unit) | | |
(c) Total Number of Shares
(or Units) Purchased as
Part of Publicly Announced
Plans or Programs | |
(d) Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased
Under the Plans or
Programs |
| November 2022 | |
162,527 | | |
| | | |
N/A | |
N/A |
| December 2022 | |
— | | |
| | | |
N/A | |
N/A |
| January 2023 | |
— | | |
| | | |
N/A | |
N/A |
| February 2023 | |
— | | |
| | | |
N/A | |
N/A |
| March 2023 | |
79,148 | | |
| | | |
N/A | |
N/A |
| April 2023 | |
— | | |
| | | |
N/A | |
N/A |
| Total | |
241,675 | | |
$ | 4.32 | | |
N/A | |
N/A |
Item 10. Submission of Matters to a Vote of Security Holders
There have been no material changes to the procedures by which shareholders
may recommend nominee to the Fund’s Board of Directors since the Fund last provided disclosure in response to this item.
Item 11. Controls and Procedures
(a) The registrant’s principal executive officer and principal
financial officer have concluded that the registrant’s disclosure controls and procedures are sufficient to ensure that information
required to be disclosed by the registrant 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 period covered by this report that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting.
Item 12. Disclosure of Securities Lending Activities for Closed-End
Management Investment Companies.
(a) For the Semi-Annual period April
30, 2023, the Fund earned income and incurred the following costs and expenses as a result of its securities lending activities:
| Fund | |
Revenue Split | |
Cash
Collateral
Management
Fees | |
Administration
Fees | |
Indemnification
Fees | |
Rebates to
Borrowers | |
Other Fees | |
Total Costs of
the Securities
Lending
Activities | |
Net Income
from
the
Securities
Lending
Activities |
| Morgan Stanley Emerging
Markets Domestic Debt Fund, Inc. | |
N/A | |
N/A | |
N/A | |
N/A | |
N/A | |
N/A | |
N/A | |
N/A |
(b) Pursuant to an agreement between
the Fund and State Street Bank and Trust Company (“State Street”), the Fund may lend its securities through State Street as
securities lending agent to certain qualified borrowers. As securities lending agent of the Fund, State Street administers the Fund’s
securities lending program. These services include arranging the loans of securities with approved borrowers and their return to the Fund
upon loan termination, negotiating the terms of such loans, selecting the securities to be loaned and monitoring dividend activity relating
to loaned securities. State Street also marks to market daily the value of loaned securities and collateral and may require additional
collateral as necessary from borrowers. State Street may also, in its capacity as securities lending agent, invest cash received as collateral
in pre-approved investments in accordance with the Securities Lending Authorization Agreement. State Street maintains records of loans
made and income derived therefrom and makes available such records that the Fund deems necessary to monitor the securities lending program.
Item 13. Exhibits
(a) Code of Ethics – Not applicable for semiannual reports.
(b) A separate certification for each principal executive officer and principal financial officer of the registrant as part of EX-99.CERT.
(c) Section 906 certification.
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.
| Morgan Stanley Emerging Markets Domestic
Debt Fund, Inc. |
|
| |
|
| /s/ John H. Gernon |
|
| John H. Gernon |
|
| Principal Executive Officer |
|
| June 20, 2023 |
|
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.
| /s/
John H. Gernon |
|
| John H. Gernon |
|
| Principal Executive Officer |
|
| June 20, 2023 |
|
| |
|
| /s/ Francis J.
Smith |
|
| Francis J. Smith |
|
| Principal Financial Officer |
|
| June 20, 2023 |
|
Exhibit 99.CERT
EXHIBIT 13 B1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
CERTIFICATIONS
I, John H. Gernon, certify that:
1. I have reviewed this report on Form N-CSR of Morgan Stanley
Emerging Markets Domestic Debt Fund, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial
information included in this report, fairly present in all material respects the financial condition, results of operations, changes in
net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and
for, the periods presented in this report;
4. The registrant’s other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company
Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for
the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
b) designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure
controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of a date within 90 days prior to the filing date of this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during period covered by this report that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have
disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize, and report financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant’s internal controls over financial reporting.
Date: June 20, 2023
| |
/s/
John H. Gernon |
| |
John H. Gernon |
| |
Principal Executive Officer |
EXHIBIT 13 B2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
CERTIFICATIONS
I, Francis J. Smith, certify that:
1. I have reviewed this report on Form N-CSR of Morgan Stanley
Emerging Markets Domestic Debt Fund, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial
information included in this report, fairly present in all material respects the financial condition, results of operations, changes in
net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and
for, the periods presented in this report;
4. The registrant’s other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company
Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for
the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
b) designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure
controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of a date within 90 days prior to the filing date of this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have
disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize, and report financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant’s internal controls over financial reporting.
Date: June 20, 2023
| |
/s/
Francis J. Smith |
| |
Francis J. Smith |
| |
Principal Financial Officer |
Exhibit 99.906CERT
EXHIBIT 13 C1
SECTION 906 CERTIFICATION
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
In connection with the Report on Form N-CSR (the “Report”)
of the above-named issuer for the period ended April 30, 2023 that is accompanied by this certification, the undersigned hereby certifies
that:
1. The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations of the Issuer.
Date: June 20, 2023
| |
/s/
John H. Gernon |
| |
John H. Gernon |
| |
Principal Executive Officer |
A signed original of this written statement required by Section 906
has been provided to Morgan Stanley Emerging Markets Domestic Debt Fund, Inc. and will be retained by Morgan Stanley Emerging Markets
Domestic Debt Fund, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 13 C2
SECTION 906 CERTIFICATION
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc.
In connection with the Report on Form N-CSR (the “Report”)
of the above-named issuer for the period ended April 30, 2023 that is accompanied by this certification, the undersigned hereby certifies
that:
1. The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations of the Issuer.
Date: June 20, 2023
| |
/s/
Francis J. Smith |
| |
Francis J. Smith |
| |
Principal Financial Officer |
A signed original of this written statement required by Section 906
has been provided to Morgan Stanley Emerging Markets Domestic Debt Fund, Inc. and will be retained by Morgan Stanley Emerging Markets
Domestic Debt Fund, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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