Photographer: Bryan van der Beek/Bloomberg

President Rodrigo Duterte’s death squads didn’t kill corruption in the Philippines last year. But they killed freedom and democracy, and will kill the country’s economic growth and equity market.

The Philippines dropped six notches in the 2016 Corruption Index country ranking published recently by Transparency International.

That has been raising concerns about death squads and the future of the country’s democratic institutions. “President Duterte’s dramatic rise to power in the Philippines made extensive use of anti-corruption rhetoric,” states Transparency International. “Yet, the impact of death squads, attacks on media and violent intimidation to the detriment of democracy and democratic institutions is yet to be seen in 2017.”

CountryCorruption Index in 2010Corruption Index 2015Corruption Index in 2016

Source: Transparency International 

Fighting corruption is a big bet for Philippines and for foreign investors buying Philippine stocks. Why? Because winning it would mean the Philippines has won the war against corruption and pushed forward and become a developed country.

On the other hand, losing the bet would mean the Philippines has lost the corruption war, and slid back to frontier status; and that seems to be the case with the Philippines, as the country’s corruption ranking continues to slide in recent years.

Fund3-Month Performance6-Month Performance
ishares MSCI China (FXI)-0.97%3.54
iShares MSCI Philippines (EPHE)-2.75-13.34
iShares MSCI Emerging Markets (EEM)0.964.10
Market Vectors Vietnam ETF (VNM)-5.85-8.86

Source: 1/26/2017 

While President Duterte has been ineffective in fighting corruption, his flip-flops over the South China Sea disputes have been taking their toll on the Philippines‘ stocks, which are down 13.34 percent in the last six months—see table. Apparently, investors are concerned about the political and economic future of that nation, and the prospects for on-going economic integration of the region and the global economy — most notably China, which needs a market frontier for its manufacturing products.

That’s why the Philippines market sell-off has touched other markets in the region, like Vietnam, which has lost 8.86 percent over the same period.