The Fitch ratings agency has said that the economy will need "substantial fiscal consolidation" if the Government's deficit targets are to be met.
In a note today, the agency said the EU's "Excessive Deficit Procedure" will act as a medium term "anchor" for the Government, adding that it expects more austerity policies to be implemented in 2014 and 2015.
Fitch said the economy remains "fragile" and the risks to the banking sector have not yet disappeared.
However, it said it expects Bank of Ireland and AIB to return to profitability next year on the back of a fall in funding costs.
The rating agency said it believes the banks will be forced to increase their level of impairment charges next year.
It said these extra impairments would position the banks in a better place to withstand European stress tests in 2014.
Bank of Ireland said earlier this month that the Central Bank estimates it may need to increase provisions by €1.1 billion.
Minister for Finance Michael Noonan has said that there is no evidence the Irish banks will need additional capital as they face a third round of European stress tests next year.
The country agreed to carry out a balance-sheet assessment of its banks last month before the Government exited a three-year international bailout yesterday.
Bank of Ireland and the other two banks reviewed, AIB and Permanent TSB, each said they did not need more capital.
On the property market, Fitch also said it believes repossessions will be used as a last resort, as banks are showing "willingness" to work with borrowers to achieve the best outcome for both sides.
It said it expects loan impairment charges to stabilise and then fall gradually and non-performing loans to peak next year.
"A reducing unemployment rate and changes in legislation, including the credible threat of home repossession, could help improve asset quality," it said.