State-owned banks won’t be able to prop up the EGP for much longer than “a few more months at most,” Capital Economics said in a research notethat suggests the Central Bank of Egypt had been leaning on state banks to mobilize their FX liquidity and thereby avoid agitating the IMF by directly intervening. Even though the EGP has outperformed its emerging market peers, Egypt’s treasury market has seen an outflow of USD 8 bn in recent months. And since April, the yield on 10-year local currency government bonds has jumped by c. 300 bps while the EGX has lost 30% — all of it driven by “a withdrawal of foreign investment.”

Background: Capital Economics had first flagged the possibility the CBE was pushing banks to prop up the EGP, a refrain Reuters picked up last month.

Factoid of the morning: The share of treasury bills held by foreign investors has tumbled from 33% in April to less than 20% now, Capital Economics writes.

How soon is soon? “It’s difficult to know for how long this process could be sustained. At the current rate of depletion, banks would exhaust their FX assets in eight months,” the consultancy said. “Banks’ foreign assets have fallen to 4% of total assets and they could drop to 2.5% of total assets, the level prior to the 2016 devaluation, by early 2019.”

So, what now? The central bank has two options, Capital Economics argues: Allow the pound to weaken or draw down its FX reserves to defend the current rate.

How much could the EGP slip? Not much. “Given the improvement in Egypt’s balance of payments position in recent years and that the pound doesn’t appear to be overvalued, we doubt that the currency would experience a major leg down in this scenario. It would also send a positive signal about policymakers’ commitment to a fully floating exchange rate,” Capital Economics’ Jason Tuvey writes in the note. “Overall, we expect the pound to fall from USD 17.90 at present to USD 19 by the end of next year and to USD 20 by end-2020,” CNBC also breaks down the report.