Can Brazil battle its economic headwinds?

Brazil: 'Interesting panorama' ahead of elections
Brazil: 'Interesting panorama' ahead of elections   

Should Brazil's inflation, slowing economic growth and the political risk put investors off? Not necessarily, according to one Latin America analyst.

"I think the long-term fundamentals in the country are still quite good, when you're looking ahead five to 10 years. It's not just about the growth rate, it's about the markets and where the opportunities for investment are," James Lockhart-Smith, principal Latin America analyst at Maplecroft, told CNBC on Friday.

"Panama might have a much higher growth rate but Brazil is still the main economy in the region. So I wouldn't be so pessimistic about it. It's neither as good as the government says it is, or as bad as a lot of market commentators say."

Despite Lockhart-Smith's confidence, Brazil's economic fundamentals are shaky. The country's gross domestic product (GDP) growth has slowed from 7.5 percent in 2010 -- when the economy was largely fuelled by foreign investments, a credit boom and consumption -- to a predicted 2.5 percent in both 2013 and 2014, according to figures from the International Monetary Fund (IMF).

(Read more: Where now for Brazil after rates hiked for fifth month?)

Inflation is expected to remain well above the Central Bank of Brazil (CBB) 4.5 percent target when the country's consumer price index (CPI) data is release later on Friday, details which could further prompt the central bank to hike interest rates further despite a backdrop of slowing growth.

In December, the central bank hiked its benchmark rate interest rate further to a record 10 percent, the highest since March 2012.

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Jamie McDonald | Getty Images For Laureus

"The wheels have been half-off [the Brazilian economy] for quite a long time," Lockhart Smith said. "Whatever the inflation figures say, I think we're going to see a continuation of a general trend of the CPI only falling slightly stay around or below 5.7 percent."

When the central bank makes its next interest rate announcement next week, it could well raise rates a further 50 basis points (bps), Lockhart-Smith said, adding that he expected a further couple of rate hikes of 25 bps before mid-year.

In a additional show of concern about Latin America's troubled largest economy, Brazil's Treasury paid the highest yield ever to launch a new 10-year benchmark fixed-rate bond on Thursday. It could also face political upheaval come presidential elections in October, Maplecroft's analyst said.

"In the short term, it means there is a lot of political risk but if you're investing long there's going to be lot of room to be contrarian."

The CBB faces a tough task getting its economy back on an even keel as it implements interest rate hikes to mitigate the negative impact of inflation as the growth rate declines.

(Read more: Forget bank runs, credit crazy Brazil is heading for trouble)

Adding insult to the injury of slowing growth, Brazil has seen the value of its currency, the real, fall against the dollar since the U.S. Federal Reserve announced its intention last May to reduce its monetary stimulus program – a policy which had boosted investment and capital flows into emerging markets like Brazil.

Indeed, at the time Brazil's finance minister accused the U.S. of engaging in"currency wars" -- of competitively devaluing its currency -- as the real strengthened against the dollar on the back of stimulus measures. Since the Fed announced its bond-buying "tapering," however, the real has successively weakened around 20 percent since last March when it traded at a high of 1.9419 per dollar, to 2.3911 per dollar this week.

Lockhart-Smith said the situation was "very ironic" given the rhetoric Brazil used to have over currency wars a few years ago. "I think you'll continue to see the currency weaken but I don't think we'll see the large swings across markets that we saw last year," he added, however.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

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