While the Covid-19 pandemic has hit the domestic economy hard, a report said the Government's "sizeable" fiscal response has shielded households and businesses from a temporary but severe liquidity shock.
In its latest snapshot of the Irish economy, S&P Global predicts that the underlying domestic economy - based on modified gross national income (GNI*) - will expand by 4% in 2021.
This will follow a contraction of over 6% in 2020.
"Ireland's productive human and physical capital, flexible labour markets, and European Central Bank monetary support position the economy well for a strong recovery in 2021-2022," S&P said.
"The stable outlook on Ireland reflects our view that the adverse economic and budgetary effects of the Covid-19 pandemic will be contained without lasting and structural damage to the country's credit metrics," it added.
But S&P's report also said that Irish banks are facing "structural and cyclical headwinds" as they begin 2021.
S&P said the sharp economic slowdown during 2020 due to Covid-19 had taken a toll on the banks' operating environment.
It warned this could lead to weaker business prospects and profitability, both of which were already under pressure before the outbreak of Covid-19.
S&P said that most Irish domestic banks' profitability is under increasing pressure due to compressing interest margins and a high cost base.
"While most banks are investing significantly in business transformation and digital capability, it remains uncertain whether these initiatives will make a material difference to operating performance in the near term," the ratings agency added.