By Guillermo Parra-Bernal

Dec. 10 (Bloomberg) -- Latin American economies may face the biggest challenge to growth in almost five years in 2008 as the U.S. economy will probably go into a recession, Morgan Stanley & Co. forecast in a report.

The impact on Latin America of a U.S. slowdown has been underestimated, Gray Newman, chief Latin America economist for Morgan Stanley, and analyst Daniel Volberg wrote in a report today. Morgan Stanley is predicting that the U.S. economy, the world's largest and the biggest market for Latin exports, will shrink in the first half of next year as consumption stalls.

A U.S. slowdown may test whether Latin American government efforts to impose budget and monetary discipline and diversify export markets have been adequate to safeguard long-term growth, following four years of record commodity exports and low borrowing costs, Newman said.

``We found that most of the improvement in Latin America since we first started observing the abundance in 2003 has come from external factors,'' Newman said in a phone interview from Boston. ``So if a U.S. recession unfolds in 2008, Latin America would face the first major test of the decoupling thesis.''

Morgan Stanley trimmed Mexico's 2008 growth forecast to 2.6 percent from 3.2 percent, citing the country's close trade links with the U.S. Central banks in Brazil, Colombia and Peru may have little or no room to ease monetary policy along next year.

Mexico sends more than 80 percent of exports to the U.S. Brazil, which has become overly dependent on overseas commodity sales, may see growth slow to 3 percent from about 5 percent now should slowing U.S. growth dent global commodity demand, the report said.

Morgan Stanley is the second-biggest U.S. securities firm.

---Editor: Fred Strasser, Robert Jameson.

To contact the reporter on this story: Guillermo Parra-Bernal in Sao Paulo at [email protected]